Corporate GovernanceCorporate Governance

CORPORATE GOVERNANCE

WHAT IS CORPORATE GOVERNANCE – PROCESSES AND STRUCTURE BY WHICH BUSINESS AND AFFAIRS OF CORPORATE SECTOR IS DIRECTED AND MANAGED

OBJECTIVE OF CORPORATE GOVERNANCE a) TO BUILD UP AN ENVIRONMENT OF TRUST AND CONFIDENCE AMONGST THOSE HAVING COMPETING AND CONFLICTING INTEREST

b) TO ENHANCE SHAREHOLDERS’ VALUE AND PROTECT THE INTEREST OF OTHER STAKEHOLDERS BY ENHANCING THE CORPORATE PERFORMANCE AND ACCOUNTABILITY

Some Definitions

• “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,

An Indian Definition

• “…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

Some Further Definitions

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

Board Role & Responsibility

• Provide/ Exercise

– Leadership and Strategic Guidance

– Objective Judgement Independent of Management

– Control over the Company

• Direct and Control the Management of the Company

• Be Accountable at all times to All Shareholders

Dimensions of Board Responsibility

• Direction involves– Formulation & Review of Company Policies,

Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc

– Setting Objectives & Monitoring Performance– Oversight of Acquisitions, Divestitures,

Projects, Financial and Legal Compliance, etc

Dimensions of Board Responsibility

• Control Involves– Prescribing Codes of Conduct, – Overseeing Disclosure & Communication

Processes,– Ensuring Control Systems to Protect Company

Assets– Reviewing Performance & Realigning Action

Initiatives to Achieve Company Objectives

Dimensions of Board Responsibility

• Accountability Involves– Creating, Protecting and Enhancing Company

Wealth and Resources– Timely and Transparent Reporting– Good Corporate Citizenry including Discharge

of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal

Corporate Governance & Capital Market Drivers: A Conceptual Framework

Listed Corporations(The Board & the Executive)

Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements

Market Operators Institutional Investors Press/Media (Rewards) (Pension Funds/Insce Cos) (Opinion Makers)

Lenders(Banks/

Depositors)

Shareholders/Stakeholders

REGULATION & LEGISLATION

Market Operations, Critique & Monitoring

4

•Independence, tenure and age of directors

•Independent nomination committee

•Frequent meetings of board and sub committees with regular attendance

•Sufficient sub committees to handle key corporate issues

•Stringency of criteria for CEO to qualify for annual bonus

•Reasonable director compensation

•Distributed ownership is viewed as optimal to protect all shareholder interests

•History of equal treatment of shareholders

Best practices are focused on

.)• Increase the role and authority of independent

directors

• Tighten the definition of “independent” directors

• Foster focus on good corporate governance

• Shareholders given opportunity to monitor &

participate in governance process

• Establishing new control and enforcement

mechanisms

The objective of CG

• Directors are subjected to their duties, obligations, and responsibilities

• Act in the best interest of the company

• To give direction to the corporation

• To remain accountable to the shareholders and all other stakeholders

IMPLEMENTATION OF CORPORATE GOVERNANCE IN INDIA

SHRI KUMAR MANGALAM COMMITTEE – CONSTITUTED IN MAY 1999 TO PROMOTE AND RAISE THE STANDARD OF CORPORATE GOVERNANCE IN INDIA

MANDATORY RECOMMENDATIONS OF BIRLA COMMITTEE:

APPLIES TO LISTED COMPANIES WITH PAID UP CAPITAL OF Rs.3 CRORE AND ABOVE

COMPOSITION OF BOARD OF DIRECTORS – OPTIMUM COMBINATION OF EXECUTIVE & NON-EXECUTIVE DIRECTORS

AUDIT COMMITTEE – WITH 3 INDEPENDENT DIRECTORS WITH ONE HAVING FINANCIAL AND ACCOUNTING KNOWLEDGE.

CORPORATE GOVERNANCE - ULTIMATE OBJECTIVE

TO ATTAIN HIGHEST STANDARD OF PROCEDURES AND PRACTICES FOLLOWED BY THE CORPORATE WORLD SO AS TO HAVE TRANSPARENCY IN ITS FUNCTIONING WITH AN ULTIMATE AIM TO MAXIMISE THE VALUE OF VARIOUS STAKEHOLDERS.

Creating Effective Boards

Respect, trust and candor

Culture of open dissent

Role maker rather a role taker

Individual accountability

Individual directors performance assessment

Board’s performance evaluation

Corporate Governance Issues

Ownership related

Management Related

Power- structure related

Personal wealth creation

Environmen

t Social

Economic

An Enterprise’s Triple Effect on Society

BusinessImpact

Sustainable Development Equal Opportunities

Waste Control Education & Culture

Emissions Community Regeneration

Energy Use Human Rights

Product EmployeeLife-cycle Volunteers

Product Wealth Productive Ethical Value Generation Employment Trading

The Triple-Bottomline Impact

Business Impact

environment society

economics

Some Closing Thoughts

• Right-Size the Board and its Composition

• Complementary Skill-Sets & Financial Acumen Essential

• Fit & Proper Criteria for Membership

• More Focus on Oversight, Less on Micro-Management

• Contribution as Important as Surveillance