Bgs chapter 3

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CHAPTER -3Presented by- Kiran.ShettyBGSIT


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Corporate governance• Introduction:Corporate governance involves a set of relationships

between a company’s management, its board, its shareholders and other stake holders

Corporate governance also provides the structure through which the objectives of the company are set.


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Definitions• Corporate governance can be viewed as set of

arrangements internal to the corporation that define the relationship between the owners and managers of the corporation.

• Monks and Minow(2001)- corporate governance is the relationship among various participants in determining the direction and performance of corporations. The primary participants are the shareholders, the management, and the board of directors


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OECD(ORGANIZATION FOR ECONOMIC AND CO OPERATION DEVELOPMENT)• Corporate governance is the system by which business

corporations are directed and controlled. the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporations, such as the board,managers,shareholders and stakeholders.


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Significance and importance of corporate governance• Changing the ownership structure: ownership structure

of the company has been changed in the recent years. public financial institutions,mututal funds are the single largest shareholder in most of the large companies. They force the management to use the corporate governance.

• So they frame consumer friendly policies in order to protect all social groups and to protect the governance.

• Importance of social responsibity:The board of directors have to protect the interest of the

stakeholders including (customers,employees,sharholders,suppliers,local communities).

This is possible only if they use corporate governance.


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• Growing number of Scams:in recent years, many scams, frauds happening in the entire

world. Misuse of public money is happening in the financial institutions.

In order to avoid these scams many companies have started using corporate governance.

Indifference on the part of shareholders:in general shareholders are inactive in the management of

their companies. They only attend annual general meeting. Shareholders associations are not strong. Directors misuse their power so in order to curb their activity corporate governance is requried.


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• Globalization: most of the companies are selling their goods in global markets. So they have to attract foreign investor and foreign customers. They have to follow foreign rules and foreign regulations. Without corporate governance it is impossible to eneter,survive and succeed in the global market.

• Takeovers and Mergers:Today, there are many takeovers and mergers in the

business world. Corporate governance is required to protect the interest of all the parties during takeovers and mergers.

• SEBI(securities exchange board of India):SEBI has made corporate governance compulsory for certain

companies. It is done to protect the interest of the shareholders


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Benefits of corporate governance• Good corporate governance ensures corporate success

and economic growth.• Strong corporate governance maintains investors

confidence, as a result of which, company can raise capital efficiently and effectively.

• it lowers the cost of capital• There is a positive impact on the share price• It provides proper inducement to the owners as well as

managers to achieve objectives that are in interests of the shareholders and the organization.


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• Good corporate governance also minimizes wastages, corruption, risks, and mismanagement.

• It helps in brand formation and its development.• It ensures an organization to manage in a manner that fits

the best interests of all.


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Two models of corporate governance• Market model or outsider (shareholder) model• Control model or insider (stakeholder) model

• 1. Market model:Mathematical representation of the interaction among various participants, economic forces, and choices made. There are hundreds or even thousands of market models that attempt to explain or predict the behavior of one or more aspects of a market.


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characteristics• A priority to market regulation• The owners of firms tend to have a

transitory interest in the firm.• The absence of close relationships

between shareholders and management.• The existence of an active market for

corporate control takeovers, particularly hostile ones.• The primacy of shareholder rights over

those of other organizational groups.


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2. Control Model or insider (stakeholder) model•The priority to stakeholder control•The owners of firms tend to have an

enduring interest in the company•They often hold position on the board of

directors or other senior managerial positions

•The relationships between management and shareholders are close and stable

•There is little by way of a market for corporate control


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OECD ON corporate governance(orgn for economic co-operation and development)•Corporate governance is based on

conducting the business with all integrity and fairness

the following are the few points that has to be considered

1. Rights and equitable treatment of shareholders:orgn should respect the rights of shareholders


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• 2. Interests of other stakeholders: orgn should recognize that they have legal,contractual,social,and market driven obligations to non shareholder stakeholders including employees,investors,creditors,suppliers,customers

• 3. Role and responsibilities of the board: the board needs sufficient relevant skills and understanding to review and challenge management performance


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•4.integrity and ethical behavior:Integrity should be a fundamental

requirement in choosing corporate officers and board members. Orgn should develop a code of conduct for their directors

5.Disclosure and transparency:Orgn should clarify and make publicly known

the roles and responsibilities of board and management to provide stakeholders with a level of accountability


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Issues in corporate governance•Duties of directors: The CG(Corporate

governance) aimed to build on the director duties as defined in statutory and case law duties of directors.

•Composition and Balance sheet of the board

•Remuneration and Reward of directors•Reliability of financial Reporting and

External Auditors


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•Board responsibility for Risk management and internal control

•Shareholders rights and responsibilities •Corporate social responsibility and

business ethics


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Obligation to society•CSR also known as corporate

responsibility, corporate citizenship, responsible business, Sustainable responsible business is a form of corporate self regulation integrated into a business model

•The below points justify the obligation towards society


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1. Potential business benefits: the scale and nature of the benefits of CSR of an orgn can vary depending on the nature of the business. There is a strong positive correlation between social/environmental performance and financial performance.

2.Human resources:A CSR program can be an aid to recruitment and

retention, particularly within the graduate student market. Potential recruits often ask about a firm’s CSR policy during the recruitment


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3. Risk Management: Managing risk is a central part of many corporate strategies. Reputation that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. They minimize the risks involved in managing governments, courts


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4. Brand differentiation:In crowded market places, companies

strive for a unique selling propositions that can separate them from the competition in the minds of consumers.CSR play a vital role in building ethical values


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5. License to operate:Corporations keen to avoid interference in their

business through taxation or regulations. By taking substantive voluntary steps, they can persuade governments.

6.Stakeholder priorities:Increasingly, corporations are motivated to

become more socially responsible because their most important stakeholders expect them to understand and address the social and community issues that are relevant to them.


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Obligations to investors• The principles for responsible investments1. Address employee social governance(employee social

governance) issues in investment policy statements2. Support development of employee social governance

related tools, metrics and analysis3. Assess the capabilities of internal investment

managers to incorporate ESG issues4. Assess the capabilities of external investment

managers to incorporate ESG issues.5. Encourage academic and other research on this

theme.6. Advocate ESG training for investment professionals


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Obligation to employees, customers and managerial obligation1. Code of conduct• Awareness of the areas of ethical risk• Honest and ethical conduct, including the ethical

handling of actual or apparent conflicts of interest between personal and professional relationships.

• A culture of honesty and accountability• Full ,fair,accurate ,timely and understandable

disclosure in reports and documents that the company files or submits to regulators and in other public communications made by the company.


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• Compliance with applicable government laws,rules,regulations and company policies

2.Compliance with law the co expects all directors. Officers and

employees to comply with all applicable laws, rules and regulations and to be able to recognize potential liabilities, seeking legal and advice where appropriate

The co expects all directors, officers and employees to comply with this code and all other company policies


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3. Disclosure of information:It is the company’s policy to make full,

timely and complete disclosure of important information concerning its activities.

4.Accounting records and practices-The company’s books and records will

reflect all company transactions in an accurate and timely manner. In particular all funds and assets will be properly recorded


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5.Prohibited payments-Directors, officers and employees are prohibited from paying or accepting any bribe, kickbacks or any other unlawful payment or benefit to secure any concession, contract or any other favorable treatment.Directors,officers and employees will report any such attempted actions in accordance with clause 14


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6. Fair dealingEach director, officer and employee shall

Endeavour to deal fairly with the company’s customers,suppliers,competitors and employees. No director, officer and employee is permitted to take unfair advantage of anyone through ,manipulation, abuse of privileged information, misrepresentation of material facts or any other unfair dealing practice


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7. Conflicts of interestA conflict of interest occurs when an individual’s private interest

interferes in any way or even appears to interfere with the interests of the company as a whole. A conflict arises when a director fails to perform his basic duty or obligations

8.Corporate opportunities:Directors, officers and employees are prohibited from a)taking

for themselves personally opportunities that are discovered through the use of corporate property, information or position

b)Using corporate property, information of position for personal gain.

c)Competing with the company,directors,officers and employees owe a duty to the co to advance its legitimate interests when the opportunity to do so arises.


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9.Use of corporate property•The co assets must not be

misappropriated for personal use by directors, officers or employees.

•Directors, officers and employees shall protect the company’s assets and ensure their efficient use.


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•THANK YOU

Leadership & Management

Bgs chapter 3