CGCSR

Corporate Disclosure and Investor protection

SEBI disclosure and investor protection Guidelines: Fixation and justification of issue price Risk Factors and Management perception Industry analysis report Installed capacity and capacity utilisation Past track record and projected financial analysis Comparison of financial data with industry averages Stock Market data analysis Profitability Ratios Earning per share (EPS) NAV Per share Return on Net worth P/E Ratio

Disclosure and Transparency as per OECD principles

Disclosure should include, but not be limited to material information on financial and operating results of the co. , objectives etc

Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosure

An annual audit should be conducted by an independent, component and qualified, auditor in order to provide and external and objective assurance to the board and shareholders.

External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit

Channels for disseminating information should provide for equal, timely and cost efficient access to relevant information by users.

The corporate Governance framework should be complemented by an effective approach that addresses and promotes the provision of analysis or advise by analysts brokers etc.

Recent Theoretical development on corporate governance

Agency Theory Stewardship theory Stakeholder Theory Sociological theory

Agency Theory Roots from Adam smith who identified an agency problem Terms :- Principal, Agent, Agency cost and agency problem Principal:- Shareholders (the owners) Agents:- Management Agency problem:- the mismatch in the objectives of

shareholders and managers Agency cost :- The extent to which the returns to the

owners fall. The core corporate governance is designing and putting in

place disclosures, monitoring, “oversight” and corrective systems that can align the objectives of the two sets of players as closely as possible and, hence, minimize agency cost.

Two broad mechanism that help reduce agency cost and improve performance through better governance

Fair and accurate financial disclosure Efficient and independent board of

directors

Problems with the Agency Theory

The total control of management is neither feasible nor required under this theory.

The question of its utility as a theoretical model to promote corporate governance.

The assumption in the trade-off that shareholders make on employing agents is that they must accept a certain level of self-interested behaviours in delegation responsibility to others.

Assumption of shareholders getting correct and adequate information to make effective control. Equity investors rarely get these and besides they rarely make clear their exact target returns, and yet dlegate authority to meet the target.

Stewardship theory This theory assumes that managers are basically trustworthy

and attach significant value to their own personal reputations. It defines situations in which managers are stewards whose motives are aligned with the objectives of their principles.

Given a choice between self-serving behaviour and pro-organisational behaviour, a steward’s behaviour will not depart from the interests of his/her organisation.

Control can be potentially counterproductive, because it undermines the pro-oragnisational behaviour of the steward, by lowering his/her motivation

Stakeholder Theory The theory synthesis of economics, behavioural science,

business ethics and the stakeholder concept. The theory considers the firm as an input-out put model

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

It is grounded in many normative, theoretical perspectives including ethics of care, the ethics of fiduciary relationships, social contract theory, theory of property rights etc.

Problems of Stakeholder theory

Defining the stakeholder? Expansive list It is not applicable in practice by

corporations

Sociological theory

This has focus on board composition and the implications for power and wealth distribution in society. Problems of interlocking directorships and the concentration of directorships in the hands of a privileged class are viewed as major challenges to equity and social progress.

Governance Orientation Matrix

Globalisation and corporate governance The company should follow the governance

mechanism which will be commonly acceptable to all over the world.

Due to open market sys., the company should be more careful in their operations. Any small corruption will be known to the people since people are now aware of their rights, and privileges, the company’s duties and responsibilities.

The good governance will be a competitive advantage for the company in the world wide market among the competitors

Models of corporate governance

Anglo-American Model German Model Japanese Model Indian Model (Mix of anglo-American)

Anglo-American model Also known as Unitary board model/Anglo-

Saxon model All directors participate in a signle board

comprising both executive and non-executive directors in varying proportions

Shareholder-oriented The basis in America, Britain, Canada,

Australia and other commonwealth countries including India

Major Features of Anglo-American Model

The ownership of companies is more or less equally divided between individual shareholders and institutional shareholders

Directors are rarely independent of management

Companies are typically run by professional managers who have negligible ownership stakes. There is a fairly clear separation of ownership and management.

Major Features of Anglo-American Model

Most institutional investors are reluctant activists. If they are not satisfied with the co.’s activities they will just sell the securities.

Disclosure norms are comprehensive, the rules against the insider trading tight, and the penalties for price manipulations stiff, all of which provide adequate protection to the small investor and promote general market liquidity

The Anglo American Model

-Shareholders

Board of Directors(Supervisors) Stakeholders

Officers(Managers)

Company

Regulatory/Legal SystemCreditors

Appoints & Supervises

Manage

Lien on

Stake in

Monitors and Regulates

Own

German Model Also known as two-tier board model

The CG is exercised through two boards, in which the upper board supervises the executive board on behalf of stakeholders.

More societal oriented and is called the continental European approach

German Model Though shareholders own the company, they

do not entirely dictate the governance mechanism. They elect 50% of members of supervisory board and the other half is appointed by labour unions, ensuring that employees and labourers also enjoy a share in the governance

The supervisory board appoints and monitors the management board.

Adopted in Germany, Holland and to the extent France.

The German Model Appoint – 50%

Employees and labour unions

Supervisory Board

Management Board (Including Labour Relations Officer

Shareholders

Company

Appoints and supervises

Manage

Own

Appoint 50%

The Japanese Model

This is the business nerwork model It reflects the cultural relationships

seen in the Japanese Keiretsu network, in which boards tend to be large, predominantly executive and often ritualistic.

Features of Japanese corporate governance mechanism

The president who consults both the supervisory board and the executive management is included

Importance of the lending bank is highlighted

The Japanese Model Appoint Supervisory Board

(Including President)

President

Executive Management(Primarily Board of

Directors)

Company

Shareholders Main Bank

Ratifies the president’s decisions

Consults

Manages

Provides managers, monitors and acts in emergencies

Own

Provides loans

Owns

Provides managers

Common features in German and Japanese models Banks and financial institutions have substantial

stakes in the equity capital of companies. Besides, cross holding among groups of firms is common in Japan.

Institutional investors in both the countries view themselves as long term investors. They play a fairly active role in corporate managements

The disclosure norms are not very stringent, checks on insider trading are not very comprehensive and effective, and the emphasis on liquidity is not high. All these factors lead to the efficiency of the capital market

There is hardly any system of corporate control in these countries; mergers and take-overs are rare occurrences.

Indian Model Governance Similar to UK model The Indian corporates are governed by the

Company’s Act of 1956 The pattern of private companies is mostly

that of closely held or dominated by a founder, his family and associates.

India has adopted the key tenets of the Anglo- American external and internal control mechanism after economic liberalisation.

Indian corporate governance modelExternal environment

Government regulations, Corporate culture, structure,Policies, guidelines etc. Characteristics, indluences

Internal Environment Company Vision, Mission,Policies,Norms

Company ActSEBIStock Exchange Corporate

Governance System

Internal stakeholders

AuditorsBoard of directors

Depositors, Borrowers,Customers andOther externalStakeholders

Proper governance Shareholder Value

Corporate governance outcomes/benefits to society

TransparencyInvestor protection concern for customer

Healthy corporate sector development

The important committees: Recommended the “Best practices”

The SEBI appointed Kumar Mangalam Birla committee (2000)

The Government appointed Naresh Chandra Committee (2003)

SEBI’s Narayana Murthy Committee England’s Cadbury Committee America’s Sarbanes-Oxley Act

Obligation to the society at a Large National Interest Political non alignment Legal compliances Rule of Law Honest and ethical

conduct Corporate citizenship Ethical Behaviour Social Concerns Corporate Social

Responsibility

Environment-friendliness Healthy and safe working

environment Competition Trusteeship Accountability Effectiveness and

efficiency Timely responsiveness Corporations should

uphold the fair name of the country

Obligation to Investors

Towards shareholders Measures promoting transparency

and informed shareholder participation

Transparency Financial reporting and records

Obligation to employees Fair employment practices Equal opportunities employer Encouraging whistle blowing Human treatment Participation Empowerment Equity and inclusiveness Participative and collaborative environment

Obligation to customers

Quality of products and services Products at affordable prices Unwavering commitment to customer

satisfaction

Managerial obligation Protecting company’s assets Behaviour towards government agencies Control Consensus-oriented Gifts and donations (avoid) Role and responsibilities of corporate board

and directors Direction and management must be

distinguished Managing and whole-time directors

Good governance model

-

The Good Governance Model developed by Governance International provides a new framework for policy-makers, public managers and community leaders who want to improve the governance capacity of their organisation.

"brings together the three main elements of governance:(1) multiple stakeholders (2) political and social values(3) policy outcomes

The Good Governance Model offers a flexible framework which can be used in a number of different ways:

As a self-assessment test to develop a first understanding of how well your organisation manages governance issues.

As a tool for benchmarking stakeholder perceptions and developing a 'Governance Balanced Scorecard'.

As a tool for the Governance Health Check to improve your partnership working.

Corporate Governance Mechanism

Internal Mechanisms Ownership Concentration Board of Directors Executive compensation Multi-divisional structure

External Mechanism Market for corporate control

Internal governance mechanisms

Ownership concentration:- High relative amounts of shares owned by individual shareholders and institutional investors

Board of Directors:- Individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions

Executive Compensation:- The use of salary, bonuses and long term incentives to align manager’s interests with shareholders’ interests.

Internal mechanism

Multi-divisional structure:- The creation of individual business divisions to closely monitor top-level managers’ strategic decisions

External Governance mechanism

Market for corporate control:- The purchase of a firm that is underperforming relative to industry rivals in order to improve its strategic competitiveness.

11-42 © 2006 by Nelson, a division of Thomson Canada Limited.

Governance Mechanisms

Ownership Concentration

Large block shareholders have a strong incentive to monitor management closely.

In Canada such shareholders account for 65% to 70% of publicly traded stocks (59% in the U.S.)

-Their large stakes make it worth their while to spend time, effort & expense to monitor closely.

-Institutional owners are financial institutions such as stock mutual funds and pension funds that control large-block shareholder positions.

11-43 © 2006 by Nelson, a division of Thomson Canada Limited.

Insiders

Outsiders

Boards of Directors

Set compensation of CEO & decide when to replace the CEO.

- Formally monitor & control the firm’s top-level executives.

-May lack contact with day to day operations.

A firm’s CEO & other top-level managers

RelatedOutsiders

Individuals not involved with a firm’s day-to-day operations, but who have a relationship with the company

Individuals independent of a firm’s day-to-day operations and other relationships

Governance Mechanisms

Governance issues and national cultures

Changing global environment Globalisation Information technology Knowledge society Learning society Transnational management

Multiple Spheres of Cultureor ‘interfaces’ (Saner)

! National/regionalProfessional

Functional

Company

Industry

National Cultures(Hofstede)

Country clusters: Anglo Germanic Nordic Latin European Latin America Arab ...