Corporate GovernanceModule 6

Accountability issues in corporate governance

Distinguishing the roles of board and management-

1. Select , decide the remuneration and evaluation

2. Oversee the conduct of company’s business

3. Review and approve the company’s financial objectives

4. Render advice and council to top management

5. Review the adequacy of systems

Contd..Composition of the board and

related issues-1. BOD is a “committee” elected

by the shareholders of a limited company to be responsible for the policy of the company

Contd..Separation of the roles of the

CEO and chairperson-1. CG is a link between

shareholders and the management and its decision affect the performance of the company.

2. CEO-lead the senior management team

3. Chairperson - lead the board4. Board- evaluate the

performance of senior executives including CEO.

Contd..Should the board have

committees-1. Many committees to recomment

for special committees for-2. Nomination3. Remuneration4. Auditing

Contd… Appointment to the board and directors and re-election- Directors and executive remuneration-

1. Transparency

2. Pay for performance

3. Process for determination

4. Severance for non-executive directors Disclosure and audit Protection of shareholders rights and their expectations-

1. should company’s always adhere to one share one vote principle

2. Should company’s retain voting by a show of hands or by poll

3. Should share holders approval be required for all major transactions

Dialogue with institutional shareholder issue Should investors have a say in making a company “socially

responsible corporate citizen”

Theoretical aspects of corporate governanceAgency theory- Fundamental theory Shareholders are the owners of any joint stock

limited liability company Mgmt selected by shareholders Shareholders and other stakeholders of the

company are not able to counteract Inadequate disclosure Principals may be too scattered Mismatch of objectives is called agency problem In agency theory terms, the owners are principals

and the managers are agents and there is an agency loss.

Contd..Problems with agency theory-1. Total control of management is

neither feasible nor required.2. The basic objective of agency theory

is to check the abuse in the trade-off , which is questioned.

Mechanism to reduce agency cost1. Fair and accurate financial disclosure2. Efficient and independent board of

directors

Contd..Stewardship theory1. This theory discounts the possible conflicts

between corporate management and owners and shows a preference for a board of directors made up of primarily of corporate insiders

2. This theory assumes that managers are basically trust worthy and attach significant value to their own personal reputation

3. Financial reporting , disclosure and auditing are important mechanism

4. This theory defines situations in which managers are not motivated by individual goals but rather they are stewards whose motives are aligned with the objectives of their principals

Contd..Stakeholders theory-1. Theory considers the firm as an input –

output model by explicitly adding all interest groups – employees, customers , dealers , govt and the society at large-to the corporate mix

Sociological theory-1. Focus on board composition and the

implications for power and wealth distribution in society.

2. Financial reporting , auditing necessary to promote fairness