CORPORATE

GOVERNANCE
 CORPORATE GOVERNANCE
• Corporate Governance is the application of best management
practices, compliance of law in true letter and spirit and adherence
to ethical standards for effective management and distribution of
wealth and discharge of social responsibility for sustainable
development of all stakeholders.

• The concept of corporate governance covers a set of rules,

procedures and operational structures that guides the short term
and long-term actions of the companies.
 CORPORATE GOVERNANCE
• Corporate Governance may be defined “as a set of systems,
processes and principles which ensure that a company is
governed in the best interest of all stakeholders”.

• It is the system by which companies are directed and controlled. It

is about promoting corporate fairness, transparency and
accountability.
 CORPORATE STAKEHOLDERS
Corporate Stakeholders are those groups without whose support the
corporate organization would cease to exist.

They are broadly grouped into –

1. Internal stakeholders-those who engage in economic
transactions with the organization such as owner, employees,
managers etc.
2. External Stakeholders- those who do not engage in direct
economic transactions but their actions can affect the business ex.
Government, suppliers, creditors etc.
 MAIN STAKEHOLDERS AND THEIR CONCERN
Corporate Concerns
stakeholders
Shareholders Value maximization-Profitability, Liquidity-growth-market price

Employees Benefit maximization

Government Tax, employment, true reporting, diversity

Creditors Liquidity, debt serving

Customers Quality, price, care

Trade Unions Quality of work life

Community Job, environment protection, equity

Competitors Fair play, ethical business

 RELEVANCE OF CORPORATE GOVERNANCE
• High profile business frauds and questionable business practices in
UK, USA and other countries including India have led to doubts being
cast on the integrity of the business managers. This has led to the
scrutiny of corporate governance and a desire for governments to
tighten the regulations concerning corporate governance.
• Corporate governance is all about governing corporations.
• Large enterprises are usually owned by one group of people (the
owners or shareholders) and run by another group of people (the
management or the directors)
• This separation of ownership from management creates an
issue of trust.
• The management has to be trusted to run the company in
the interest of the shareholders and other stakeholders.
 RELEVANCE OF CORPORATE GOVERNANCE
• If information were available to all stakeholders in the same form at
the same time, corporate governance would not be an issue at all.
• Armed with the same information as managers, shareholders and
the creditors would not worry about the former wasting their money
on useless projects, suppliers would not worry about the customer
not fulfilling his part of a supply agreement and customers would
not worry about a supplier for not delivering the goods agreed
upon.
• Good corporate governance means governing the corporation in
such a way that the interests of the shareholders are protected and
the other stakeholders' requirements are also fulfilled.
• It means that the directors will ensure that the company
obeys the law of the land while carrying out its business.
FOUR PILLARS OF CORPORATE GOVERNANCE
 FOUR PILLARS OF CORPORATE GOVERNANCE
Accountability
• Ensure that management is accountable to the Board
• Ensure that the Board is accountable to shareholders
Fairness
• Protect Shareholders rights
• Treat all shareholders including minorities, equitably
• Provide effective redress for violations
Transparency
Ensure timely, accurate disclosure on all material matters, including the
financial situation, performance, ownership and corporate governance
Independence
• Procedures and structures are in place so as to minimize, or avoid completely
conflicts of interest
• Independent Directors and Advisers i.e. free from the influence of others
 PRINCIPLES OF CORPORATE GOVERNANCE
Principles of fairness-
• This principle presupposes that the corporate governance framework should
ensure an equitable treatment of all shareholders, including minority and foreign
shareholders and other stakeholders such as employees, customer’s etc.
• Members of the board and key executives should be required to disclose to the
board whether directly or indirectly they have a material interest in any
transaction or matter directly affecting the corporation.
Transparency principle-
• It is willingness by the company to provide clear information to the shareholders
and other stakeholders in all aspects of the conduct of business.
• Business organizations should disclose their financial and operating results, timely
and accurately ensuring that their stakeholders understand the nature of the
organization’s operations, current state of affairs and future directions in terms of
development.
• Transparency ensures that stakeholders have confidence in the decision making
 PRINCIPLES OF CORPORATE GOVERNANCE
Principle of accountability-
• It refers to the obligation and responsibility to give an explanation for the
company’s action and conduct.
• The board should present a balanced and understandable assessment of the
company’s position and prospects.
• The board is responsible for determining the nature and the extent of the
significant risks it is willing to take.
• The board should establish formal and transparent arrangements for corporate
reporting and risk management and for maintaining an appropriate relationship
with the company’s auditor and the board should communicate to stakeholders at
regular intervals, a fair, balanced and understandable assessment of how the
company is achieving its business purpose.
Fiduciary principle-
• The directors who are agents of the shareholders who invest money and own the
organization must act with trust while discharging their duties. They must act with
loyalty, ensure full disclosure, diligence and obedience.
 PRINCIPLES OF CORPORATE GOVERNANCE
Reliability principle-
• It focuses on honoring the words and the commitment of the directors to all
stakeholders.
Principle of Dignity-
• Good corporate governance is to respect the rights and privileges of all stakeholders.
On many occasions there may be conflict of interest in protecting the rights and
privileges of different stakeholders
Propriety principle-
• It focuses on respecting the rights of those who own property.
• Shareholders being the ultimate owners of the corporate property, utmost
importance is given to protect the interest of the shareholders especially outside
shareholders who are not represented in the board of directors.
Responsiveness principle-
• Good corporate governance is to respond efficiently and effectively to the societal
needs.
ELEMENTS OF CORPORATE GOVERNANCE
• Good Board practices
• Control Environment
• Transparent disclosure
• Well-defined shareholder rights
• Board commitment
ELEMENTS OF CORPORATE GOVERNANCE
Good Board practices –
• Clearly defined roles and authorities
• Duties and responsibilities of Directors understood
• Board is well structured
• Appropriate composition and mix of skills
Good Board procedure-
• Appropriate Board procedures
• Director Remuneration in line with best practice
• Board self-evaluation and training conducted
ELEMENTS OF CORPORATE GOVERNANCE
Control Environment-
• Internal control procedures
• Risk management framework present
• Disaster recovery systems in place
• Media management techniques in use
• Business continuity procedures in place
• Independent external auditor conducts audits
• Independent audit committee established
• Internal Audit Function
• Management Information systems established
• Compliance Function established
ELEMENTS OF CORPORATE GOVERNANCE
Transparent Disclosure
• Financial Information disclosed
• Non-Financial Information disclosed
• Financials prepared according to International Financial Reporting
Standards (IFRS)
• Companies Registry filings up to date
• High-Quality annual report published
• Web-based disclosure
 ELEMENTS OF CORPORATE GOVERNANCE
Well-Defined Shareholder Rights-
• Minority shareholder rights formalized
• Well-organized shareholder meetings conducted
• Policy on extraordinary transactions
• Clearly defined dividend policy
ELEMENTS OF CORPORATE GOVERNANCE
Board Commitment –
• The Board discusses corporate governance issues and has created a
corporate governance committee
• The company has a corporate governance champion
• A corporate governance improvement plan has been created
• Appropriate resources are committed to corporate governance initiatives
• Policies and procedures have been formalized and distributed to relevant
staff
• A corporate governance code has been developed
• A code of ethics has been developed
• The company is recognized as a corporate governance leader
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to society at large-
1. National interest- A company should be committed in all its action to benefits the
economic development of the country and should not take any projects that has an
adverse impact on social and cultural life patterns of its citizens.
2. Political non-alignment-A company should be committed to and support a functioning
democratic constitution and system with a transparent and fair electoral system and
should not support directly or indirectly any specific party or candidate.
3. Legal compliance-The management of the company should comply with all applicable
government laws, rules and regulations. It also means that corporations should abide by
the tax laws of the nations in which they operate such as corporate law, income tax,
excise duty, sales tax etc.
4. Rule of Law-Good governance requires fair, legal framework that are enforced
impartially and also require full protection of rights particularly those of minority
shareholders
5. Honest and ethical conduct-Every officer of the company including its directors,
executive and non executive directors, MD,CEO,CFO and CCO should deal with
professionalism, honesty , commitment and sincerity as well as high moral and ethical
standards.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to society at large-
6.Corporate citizenship-A corporation should be committed to be good corporate citizen
not only in compliance with all relevant laws and regulations but also by actively assisting in
the improvement of quality of life of the people in the community. Such social commitment
consists of initiating and supporting community initiatives in the field of public health and
family welfare, water management, vocational training, education and literacy etc.
7. Ethical behavior-corporations have a responsibility to set exemplary standards of
ethical behavior both internally and externally. The board of directors have a moral
responsibility to ensure that the organizations does not derail from an upright path to make
short-term gains.
8. Social concern-Companies should not only think of its shareholders but also for its
stakeholders. The company should have concern for the society like the waste disposal
should not affect any human or other living creatures.
9. Corporate Social Responsibility- A developing trend is to have an integrated model of
governance towards the creation od an ideal corporate which lay emphasis on corporate
social responsiveness and ethical business practices.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to society at large-
10. Environment –Friendliness- Usually companies convert raw material from the
environment into saleable products like trees are converted into houses, furniture or
oil is converted into energy. In all such activities, a piece of nature is taken from
where it belongs to and processed into new forms. So companies have a moral
responsibility to save and protect the environment.
11. Healthy and safe working environments-Companies should be committed to
prevent the wasteful use of natural resources and minimize the hazardous impact of
the development, production, use and disposal of any of its product and service son
the ecological environment.
12. Competition-A company should lay its role in the establishment and support a
competitive and open market econmy.it should not engage in any activities which led
to the formation of monopolies or unfair trade practices. A company should market its
product on its own merits and should not resort to unethical advertisements or
include unfair and misleading pronouncements on competitors' products.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to society at large-
13. Trusteeship-The board of directors are to act as trustees to protect and enhance
shareholder value as well as to ensure that the company fulfills its obligations and
responsibilities to its other stakeholders.
14. Accountability-An organization is accountable to those who will be affected by its
decisions or actions. Accountability cannot be enforced without transparency and the
rule of law.
15. Effectiveness and efficiency-Good governance means that processes and the
institutions produce results that meets the need of society while making best use of
resources.
16. Timely responsiveness-Good governance require that institutions and processes
try to serve all stakeholders within a reasonable timeframe. They should also address the
concerns of all stakeholders and the society at large.
17. Corporations should uphold the fair name of the country-When companies
export their product or services , they should ensure that these are qualitatively goods
and are delivered on time so that it should not harm the reputation of our country.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to Investors-
1. Towards shareholders-A company should be committed to enhance
shareholders value and comply with all regulations and laws that govern
shareholder’s rights.
2. Measures promoting transparency and informed shareholder
participation- There is need to bring greater levels of informed attendance and
meaningful participation by shareholders in matters relating to their companies .
3. Transparency-It means that decisions taken and their enforcement are done in
a manner that follows rules and regulations and the information is freely
available and directly accessible to those who will be affected by such decisions.
4. Financial reporting and records-A company should prepare and maintain
accounts of its business affairs fairly and accurately in accordance with the
accounting and financial reporting standards, laws and regulations of the
country in which the company conducts its business affairs.
OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to Customers-
1. Quality of products and services- Companies should be
committed to supply goods and services of the highest quality
standards along with efficient after sales service to ensure total
satisfaction to the customers.
2. Products of affordable prices- Companies should be
committed to make the quality goods available to the customers
at affordable prices. Companies should constantly work to update
themselves with latest technology , skills and expertise to cut
down costs and pass on such benefits to the customers.
3. Unwavering commitment to customer satisfaction-
Companies should be committed to satisfy their customers and
earn their goodwill to stay for longer duration in the business.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Managerial Obligations-
1. Protecting company’s assets-The company’s tangible assets like
equipment's and machinery and intangible assets like relationships with
customers and suppliers etc. should not be misused but invested for the
purpose of conducting the business only.
2. Behavior towards government agencies- A company’s employees should
not offer or give any of the firm’s funds or property as donations to any
government agencies directly or indirectly to obtain any favor.
3. Control- Control is a necessary principle of governance that the freedom
should be exercised within a framework of appropriate checks and balances.
Control should prevent misuse of power, facilitate timely management response
to change and ensure that business risks are effectively managed.
4. Consensus-oriented-Good corporate governance requires mediation of the
interests in society to reach a broad consensus on what is in best interest of the
whole community and how it can be achieved.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Managerial Obligations-
5. Gifts and donations-company’s employees should neither receive nor make directly
any illegal payments, gifts, donations which are intended to be perceived to obtain any
business favor.
6. Role and responsibilities of corporate board and directors-Various corporate
failures, scams and other disasters demand more transparency and accountability on the
part of the corporation. So, the executive management is required to create wealth and
on the other hand such created wealth should be equally distributed to all shareholders
after completing all the obligations of all stakeholders.
7. Direction and management must be distinguished-It is necessary to distinguish
the nature of two basic components of governance in terms of policy making and
overseeing responsibilities of the board of directors and the executive and
implementation responsibilities of corporate management comprising the managing
directors and his team of executives including functional directors.
8. Managing and whole –time directors –Managing and other whole –time directors
are required to devote whole or substantially whole of their time to the affairs of the
company. An ideal corporate must limit the number of their non-executive directorship.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to Employees-
1. Fair employment practices-An ideal corporate should commit itself to fair
employment practices and should have policy against all forms of illegal
discrimination, The applicable labor and employment laws should be followed.
2. Equal opportunities employer-A company should provide equal
opportunities to all its employees and all qualified applicants for employment
irrespective of their race, caste, religion, color, gender, age, nationality and
disability.
3. Encouraging whistle –blowing-It is generally felt that if whistle blower
concerns have been addressed to some of the recent disasters could have ben
avoided. In order to prevent future misconduct, whistle blower should be
encouraged to come forward.
4. Humane treatment-Companies should treat their employees as their first
customers and above all as human.
 OBLIGATIONS OF CORPORATE GOVERNANCE
Obligations to Employees-
5.Participation-Participation by both men and women is a key cornerstone
of good governance. It could be either direct or by means of
representatives.
6. Empowerment-It is a process of actualizing the potential of its
employees. It unleashes creativity and innovation throughout the
organization by providing decision making powers in the most appropriate
levels in the organizational hierarchy.
7. Equity and inclusiveness-A corporation is a miniature of a society
whose well being depends on ensuring that all its employees feel that they
have a stake in it and do not feel excluded from the mainstream.
8. Participation and collaborative environment-It would bring peace
and harmony between the working community and the management which
in turn brings productivity, higher profits and higher market share.
BENEFITS OF CORPORATE GOVERNANCE
Benefits to corporation-
Enhancing the valuation of an enterprise-
Improved management accountability and operational transparency
fulfill investor’s expectations and confidence in management and
corporations and in return increase the value of the corporations.
Companies that adopted corporate governance standard have enhanced
their market valuations.
Ensuring compliance of laws and regulations-
More rules and regulations addressing corporate governance and
compliance have been and will be released. Compliance has become a
key agenda in establishing good corporate governance. Corporate
governance ensures the long-term survival of a corporation and enables
its shareholders long term benefits.
 BENEFITS OF CORPORATE GOVERNANCE
Benefits to society-
• A strong system of corporate governance can be major benefits to society.
Adopting standards for transparency in dealing with investors and creditors
will bring benefits to all and prevent banking crisis.
• Research proves that countries with strong corporate governance have
much larger and more liquid capital markets. Hence , for countries that try
to attract investors corporate governance matters a great deal in getting the
hard currency out of potential investors.
• When companies try to be transparent ,provide full disclosure of accounting
and auditing procedures, allowing transparency in all business transactions,
corruption will not a big role to play.
• Better corporate governance procedures can also improve the management
of the firm and help a great deal in working out business strategy, ensuring
that mergers and acquisitions are undertaken for sound business reasons.
 BENEFITS OF CORPORATE GOVERNANCE
Benefits to corporation-
Creation and enhancement of a corporation’s competitive advantage-
Creating competitive advantage requires both the vision to innovate and the strategy to
manage the process of delivering value. An effective board should be one that is able to
craft strategies that fit the business environment and threats, and to compete for the
future. Corporation should develop their strategies by involving all levels of employees
create widespread commitment to make the strategies succeed.
Enabling a corporation perform efficiently by preventing frauds and malpractices-
The Code of Best Conduct-policies and procedures governing the behavior of individuals of
a corporation form part of corporate governance. This enables a corporation to compete
more efficiently in the business environment and prevents fraud that destroy business
from inside.
Providing protection to shareholder’s interest-
Corporate governance is a set of rules that focusses on transparency of information and
management accountability. It imposes fiduciary duty on management to act in the best
interests of all shareholders and properly disclose operations of the corporations.