______________________________Assad Rafaq

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Forms of Business Overview of Corporate Governance.

Ownership & Control History,definitions,concepts & Principles

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The most common forms of business ownership are the Sole Proprietorship, Partnership, and Corporation.

Sole ProprietorshipA sole proprietorship is a business owned and operated by one individual.Legally, if you set up your business as a sole proprietorship, your business is considered to be an extension of yourself. Therefore, as a sole proprietor, you are personally responsible for all the liabilities and obligations your business incurs.

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A General Partnership is defined as a business arrangement between two or more individuals who share the profits and liabilities of the business.

Limited Partnership - A partnership consisting of one or more general partners, who have unlimited liability, and one or more limited partners, who have limited liability depending upon their contribution to the partnership. Often the limited partner contributes financially but is not otherwise involved in the business.

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Limited Liability Partnership –A limited liability partnership is often only available to groups of professionals, such as lawyers, accountants and doctors. These partnership agreements are governed by specific legislation.

Partnerships are not incorporated; each partner reports and pays income tax on his or her personal income tax return.

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"Partnership is defined as the relation between two or more persons who have agreed to share the profits and losses according to their ratio of business run by all or any one of them acting for all". This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as – “Partnership is the relation which subsists between persons who have agreed to combine their property, labour, skill in some business, and to share the profits thereof between them”. The 1932 definition added the concept of mutual agency.

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Corporation:Incorporation creates a distinct legal entity separate from its owners (shareholders).

The extended liability protection is one of the main reasons that businesses choose incorporation. Theoretically, no member of the company can be held personally liable for the debts, obligations, or acts of the company. A shareholder is only liable for the unpaid portion of shares owned(Susan Ward, About.com Guide).

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“Corporate Governance is the system by which companies are directed and controlled…”

Cadbury Report (UK), 1992 “…to do with Power and Accountability:

who exercises power, on behalf of whom, how the exercise of power is controlled.”

Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993

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“…the process and structure..to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes ensuring the financial viability of the business….”

Where were the Directors? Guidelines for Improved Corporate Governance in Canada, TSE, 1994

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“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

Preamble to the OECD Principles of Corporate Governance, 2004

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“…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.”

SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000

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Corporate governance is essentially about leadership: leadership for efficiency; leadership for probity; leadership with responsibility; and leadership which is transparent and which is

accountable.- PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH

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The Manner in which a Corporation is Run Achieving its Objectives Transparency of its Operations Accountability & Reporting Good Corporate Citizenship

The Processes & Operating Relationships that Best Achieve Organisational Goals

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Finance or the Principal-Agent ModelMarkets for Capital, Managerial Talent and

Corporate Control, Key determinant In general, profit-maximization goal is co-

functional with social-welfare-maximizationShareholders as Residual Claimants have

superior control rights

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Risk-bearing Entrepreneurs Residual Claimants Winding-up Ranking: Last in Pecking

Order Boards Appointed by Shareholders Non-congruence of Stakeholder

Interests

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“…shareholders … residual claimants to the firm’s income. Creditors have fixed claims and employees’ remunerations … negotiated in advance of performance .. Gains and losses from abnormally good or bad performance .. The lot of shareholders, who stand last in the queue .. Shareholders make discretionary decisions and bear consequences .. As such, .. Owners of business with important control rights…”

The Economic Structure of Corporate Law, Frank H Easterbrook and Daniel R Fischel (1991) OUP

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Firm Objective must be defined more widely than just shareholder-value-maximisation, since risk capital is not the only, or even the major input

Residual Claimant Rights Not Universally Valid, eg, Circumscribed in case of pre-bankruptcy (US Chapter XI) Situations

Other Such: Employees with Firm-specific Specialised Skills, Customers/Vendors with Substantial Stake in the Business, etc

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By applying Corporate Governance to the companies, there are some benefits that could be gained. The benefits are as follows:  1. Easier to raise capital;  2. Lower cost of capital; 3. Improved business performance and improved economic performance; 4. Good impact on share price. (Due to the current Indonesian situation, privatization of State-Owned Enterprises can contribute significantly to the state budget)

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