corporate governance zeenat jabbar. objectives over the past three decades, the concept of corporate...
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CORPORATE GOVERNANCE
Zeenat Jabbar
OBJECTIVES
Over the past three decades, the concept of
corporate governance has gone through a metamorphosis. Theoretically, from one that was related to agency cost, it is now perceived to encompass everyone’s interests. This chapter discusses the theoretical basis, mechanisms and the divergent models of corporate governance and culminates in the identification of an ideal corporation.
OUTLINE
The Concept of CorporationTheoretical Basis of Corporate GovernanceAgency TheoryStewardship TheoryStakeholder TheoryCorporate Governance MechanismsCorporate Governance SystemsIndian Model of Governance What Is Good Corporate GovernanceObligation to Society at LargeObligation to InvestorsObligation to EmployeesObligation to CustomersManagerial Obligation
What is a Corporate?
The term “corporate” refers to an association of many persons, who contribute money or money’s worth to a common stock and employ it in some trade or business, and who share the profit and loss arising therefrom. The common stocks so contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are its members. The proportion of the capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted.
What is Governance?
Governance is the process of decision
making and the process by which decisions are implemented or not implemented.
Characteristics of a Corporation
o Incorporated Associationo Artificial Legal Existenceo Perpetual Existenceo Common Sealo Extensive Membershipo Separation of Management and
Ownershipo Limited Liabilityo Transferability of shares
Theoretical Basis of Corporate Governance
o Agency Theoryo Problems with the Agency Theoryo Stewardship Theoryo Shareholder Vs Stakeholder Approacheso Stakeholder Theoryo Criticisms of the Stakeholder Theoryo Sociological Theory
Behavioural DifferencesTHEORY AGENCY STEWARDSHIP
Managers act as Agents Stewards
Governance Approach Materialistic Sociological and Psychological
Behaviour Pattern o Individualistico Opportunistic o Self-serving
o Collectivistic o Pro-organisational o Trustworthy
Managers motivated by Their own objectives
Principal’s objectives
Manager’s and Principal’s Interests
Differ Converge
Management Structures Monitor and control
Facilitate and empower
Owners’ Attitude Risk Avoidance Risk taken
Principal – Manager Relationship based on
Control Trust
Psychological Mechanisms
PSYCHOLOGICALRESPONSES AGENCY THEORY
STEWARDSHPTHEORY
Motivation o Lower order needs o Extrinsic needs
o Higher order needs o Intrinsic needs
Social comparison Compatriots Principal
Attachment Little attachment to company
Great attachment to company
Power Institutional Personal
Situational MechanismsSITUATIONALRESPONSES AGENCY THEORY
STEWAREDSHIPTHEORY
Management Philosophy
Control oriented Involvement oriented
While dealing with increasingUncertainty and risk
Greater controls More supervisions
Training and empowering people Making jobs to be more challenging and motivating
Risk orientation Through a system of control
Through trust
Time frame Short term based Long term based
Objective Cost control Improving performance
Cultural differences Individualism Large power
distance
Collectivism Small power
distance
Corporate Governance Mechanisms
o The Importance of Corporate Governanceo Contemporary Corporate Governance Situationo Growing Awareness and Societal Responses
Corporate Governance Systems
o Anglo-American Modelo The German Modelo The Japanese Modelo Indian Model of Corporate
Governance
Fig.1 : The Anglo-American Model
Company
Officers(Managers)
Board of Directors(Supervisors)
Legal/Regulatory System
Stakeholders
Creditors
ShareholdersElect
Monitors & Regulates
Lien on
Own
Stake in
Appoints & Supervises
Manage
Fig.2 : The German Model
Company
Management Board(Including Labour Relations Officer)
Supervisory Board
Employees and
Labour Unions
Shareholders
Appoints and Supervises
Appoint – 50%
Appoint – 50%
Manage
Fig.3 : The Japanese Model
Company
Executive Management(Primarily Board of
Directors)
President
Supervisory Board(Including President)
Main Bank
Shareholders
Provides Loans
elect
Ratifies the President’sDecisions
Consults
Manages
Provides Loans
Owns
Own
Provides Managers
Monitors & Acts in
Emergencies
Fig.4 : Indian Corporate Governance Model
External Environment
Government Regulations, Corporate Culture, Structure,Policies, Guidelines etc. Characteristics, Influences
Company Acts Depositors, Borrowers,SEBI Customers and otherStock Exchanges External Stakeholders
Internal Environment
Company vision; mission, policies, norms
Internal Auditors Stakeholders Board of Directors
Proper governance Shareholder value
Corporate Governance Outcomes / Benefits to Society
Transparency
Investor protectionConcern for customer
Healthy corporate sector development
CORPORATEGOVERNANCE
SYSTEM
What Is Good Corporate Governance?
Obligation to society at large
o National Interest
o Political Non-alignment
o Legal Compliances
o Rule of Law
o Honest and Ethical Conduct
o Corporate Citizenship
o Ethical Behaviour
o Social Concerns
o Corporate Social Responsibility
Obligation to investors
o Environment-friendliness
o Health, Safety and Working Environment
o Competition
o Trusteeship
o Accountability
o Effectiveness and Efficiency
o Timely Responsiveness
o Corporations Should Uphold the Fair Name of the Country
o Towards Shareholders o Measures Promoting Transparency and Informed
Shareholder Participationo Transparencyo Financial Reporting and Records
Obligation to customers o Quality of Products and Services
o Products at Affordable Prices
o Unwavering Commitment to
o Customer Satisfaction
Obligation to employees
o Fair Employment Practices
o Equal-opportunities Employer
o Encouraging Whistle Blowing
o Humane Treatment
o Participation
o Empowerment
o Equity and Inclusiveness
o Participative and Collaborative Environment
Managerial obligation
o Protecting Company’s Assets
o Behaviour Towards Government Agencies
o Control
o Consensus Oriented
o Gifts and Donations
o Role and Responsibilities of Corporate Board and Directors
o Direction and Management must be Distinguished
o Managing and Whole-Time Directors
Johnson & Johnson’s excellent Credo exemplarily epitomises what an ideal
corporate should aspire to be.
Our Credo
We believe our first responsibility is to the doctors, nurses and patients,
to mothers and fathers and all others who use our products and services.
In meeting their needs everything we do must be of high quality.
We must constantly strive to reduce our costsin order to maintain reasonable prices.
Customers' orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity to make a fair profit.
We are responsible to our employees,the men and women who work with us throughout the world.
Everyone must be considered as an individual.We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs.Compensation must be fair and adequate,
and working conditions clean, orderly and safe.We must be mindful of ways to help our employees fulfill their family responsibilities.
Employees must feel free to make suggestions and complaints.There must be equal opportunity for employment, development
and advancement for those qualified.We must provide competent management,and their actions must be just and ethical.
We are responsible to the communities in which we live and workand to the world community as well.
We must be good citizens – support good works and charitiesand bear our fair share of taxes.
We must encourage civic improvements and better health and education.We must maintain in good order
the property we are privileged to use,protecting the environment and natural resources.
Our final responsibility is to our stockholders.Business must make a sound profit.
We must experiment with new ideas.Research must be carried on, innovative programs developed and mistakes paid for.
New equipment must be purchased, new facilities provided and new products launched.
Reserves must be created to provide for adverse times.When we operate according to these principles,
the stockholders should realize a fair return.
Johnson & JohnsonCorporate Governance in
IndiaProblemso Inadequate Sanction and Enforcement.o No clear demarcation of control mechanisms
between SEBI, DCA and Stock Exchanges.o Lack of Professionalism of Directorso Institutional Investors show poor commitmento Indian boards are not professionalo Unindependent Independent directorso Whistle Blower Policy not in place
o Too many unlisted companieso Accounting gimmickso Poor Shareholder participationo Obliging auditorso Soft State, lethargic judiciary, inefficient market
regulator, poor enforcement machinery, and a value system which is indifferent to moral turpitudes.
However things are improving nowo The market is competition – driveno Professional new players are coming ino High growth in market – capitalisationo Well-focussed, well-researched portfolio investorso Media influences o Influence of banks and financial institutionso Realisation among Indian companies of the benefits
of corporate governance ando Impending Capital Account Convertibility will exert its
own pressure.