CORPORATE GOVERNANCE

Presented by: Friends Circle

INTRODUCTION

Separation of ownership and management

The relationship between owners and managers is expressed

The managers act as agents for owners and they takes positive view of managers

DEFINITION

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

PARTIES TO CORPORATE GOVERNANCE

Parties involved in corporate governance include the regulatory body (e.g. the chief executive officer, the board of directors, management, shareholders and Auditors). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.

COMMONLY ACCEPTED PRINCIPLES OF CORPORATE GOVERNANCE INCLUDE:

Rights and equitable treatment of shareholders

Interests of other stakeholders Role and responsibilities of the board Integrity and ethical behavior Disclosure and transparency

EXTERNAL CORPORATE GOVERNANCE CONTROLS

External corporate governance controls encompass the controls external stakeholders exercise over the organization.

Competition Debt covenants Demand for and assessment of

performance information (especially financial statements)

Government regulations Managerial labor market Media pressure

SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

Demand for information: In order to influence the directors, the

shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.

Monitoring costs: A barrier to shareholders using good

information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.

Supply of accounting information: Financial accounts form a crucial link in

enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.

CORPORATE GOVERNANCE INCLUDES: Role of the Board of Directors and

Director Responsibilities Selection of Chairman Lead Director Size of Board Director Independence Board Membership Criteria Directors Who Change Their Present Job

Responsibility Term Limits

HOW TO GOVERN IN THE TWENTY-FIRST CENTURY? The first task is to define the purpose for

which the firm has been established

It is essential to steer clear of the marketing myopia. You should not just state what you can offer to your customers ,but also what will be required by the customers in the future and how you will meet that demand.

The CEO must be able to clearly identify its stakeholders.

CONT…… A reciprocal relationship with the

stakeholders is the key to success.

You have to be transparent with your stakeholder.

CORPORATE CITIZENSHIP A corporate is vested with corporate

citizenship drawn from its right and duties from which the board assumes responsibilities

It is the primary task of the board of directors to maximize shareholder value.

Which they do with the help of the following Fairness Accountability Transparency

STEPS TO REFORM CORPORATE GOVERNANCE Institute a modern corporate governance system

which is consistent with open and free societies and economies.

Acknowledge that societies and economies are aiming at and are becoming more open and free.

In such an environment, corporations have to be competitive through the observance of market disciplines.

To competitive, corporations need to have open access to money and the appropriate organization.

CORPORATE GOVERNANCE-VARIATION WORLD WIDE For understandable reason styles of

corporate governance very across the world. History, cultural and institutional factors, habits and attitude of people.

We can categories the styles of corporate governance in three models

ANGLO-AMERICAN STYLE The chief executive made important role Capital market are quite active JAPANESE STYLE Capital market is not quite as active Long term goals are pursued in preference to short –term

goals INDIAN STYLE Family managed companies ;The body of promoters or the

parent company maintains a firm hold on the company under their management and care.

There are three kinds of directors Promoters Professional directors Director appointed by the FIs

GOVERNANCE MECHANISM

Ownership concentration is reflected in the location areas of the stakeholders, which can be spread out and yet the board has to understand their requirements.

The board is also responsible to the executives of the firm, and it is important that it looks after the executive’s interest as well with complete assessment of executive compensation

The board of directors needs to look at the following areas of activity;

Review and ratify important decisions Set compensation of CEO and decides when to replace

the CEO May lack contact with day – to –day operations.

CONT…. The board of directors must include

the following to make it broad –based and, therefore, more effective:

Insiders .A firm‘s CEO and other top level managers

Related outsiders .Individuals not involved with firms day-to-day operations; but who have relationship with the company

NEED FOR CORPORATE GOVERNANCE

Market –driven economy

Globalization—liberalization Efficiency is now a very key factor

ENHANCE CORPORATE ETHICS

Corporate governance is the code of practice by which affirms management is held responsible or accountable to charitable providers for the efficient use of assets

Corporate governance is the both ,a reactive concept and

pro –active process, and it can best be understudy as the structure and process of the following

Monitory executive performance Ensuring accountability of management to

shareholder Monitoring management for creating value

shareholder Protecting interest of other stakeholder

CONT…. Corporate governance practices create

an environment of the trust ,confidence, ethics ,and morality by synergic efforts of all constituents of society

owners and managers Performance and accountability

LEGAL AND REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE

companies act -1956 Monopolies and Restrictive Trade

practices Act,-1969 Foreign Exchange management Act -

2000 Sick industrial companies Act -1985 Exchange board of India Act -1992

CONCLUSION

Corporate governance reforms start with the board of directors, in whom final authority and full responsibility is vested

It is important to understand the ways to improve the corporate governance for as long as we keep our economy free and open.