Chap-1 Corporate Governance

Category: Entertainment

Presentation Description

corporate governance


Presentation Transcript








CONTENTS Meaning. Definition. Objectives. Theories. Problems. Conclusion.


MEANING Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.


DEFINITION “Corporate Governance is the system by which companies are directed and controlled…” Cadbury Report (UK), 1992

An Indian Definition:

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, January, 2000


OBJECTIVES To build up an environment of trust & confidence amongst competing & conflicting interest. To enhance shareholder’s value & protect the interest of other stakeholders by enhancing the corporate performance & accountability.

The Cadbury Report 1992:

The Cadbury Report 1992 Focus on three areas – Board of Directors Auditing Shareholders

Recommendations :

Recommendations BODs are most important, so requires continuous monitoring and assessment. Focus on corporate transparency and communication with shareholders. Role of Institutional Investors should be more active as they are most influential group of shareholders


Contt… Chairman and CEO – The roles to be separated Chairman – Head of the Board and CEO- Head of the Company Management Non-Executive directors - The board should have majority non-executive directors Top Management Compensation – Separating salary and performance bonus


Contt… BOD should report on the effectiveness of company’s systems of internal control The Directors service contracts should not exceed 3 years without approval by the shareholders Each listed company should establish an audit committee of at least 3 non executive directors

CG Committees formulated in India:

CG Committees formulated in India CII Committee Birla Committee Narayana Murthy Committee JJ Irani Committee Clause 49 of Listing agreement of SEBI(Jan 2006)


THEORIES Agency Theory. Stewardship Theory. Shareholder Theory. Stakeholder Theory. Political Theory

Agency Theory:

Agency Theory The very term ‘agency’ suggest a relationship between two elements or entities. In this case it is between principals or promoters of a company & their agents or managers who implements the formers brief.

Slide 16:

Agency relationships occur when one partner in a transaction (the principal) delegates authority to another (the agent) and the welfare of the principal is affected by the choices of the agent

Stewardship Theory:

Stewardship Theory The stewardship theory assumes that managers are good & trustworthy. They are appointed mainly due to their good reputation. This is done with the intention to cut bureaucracy & increase motivation, which will help the managers take quick decisions.

Slide 18:

The inclination of individuals to act as selfless stewards may be culturally contingent. The 'company man' in Japan may place his employer before family. The voluntary resignation of executives is not uncommon when a firm is disgraced and instances of suicide are still reported.

Shareholder Theory:

Shareholder Theory The important assumptions of this theory is that an individual has a complete & inalienable right to a private property & that individual liberty ensures it. Holding stocks or shares in a company are a form of private property ownership, & the shareholder alone is its rightful owner.

Slide 20:

“…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

Stakeholder Theory:

Stakeholder Theory The purpose of the firm is to create wealth or value for its stakeholders by covering their stakes into goods and services.

Slide 22:

In defining 'Stakeholder Theory' Clarkson (1994) states: '"The firm" is a system of stake holders operating within the larger system of the host society that provides the necessary legal and market infrastructure for the firm's activities. The purpose of the firm is to create wealth or value for its stake holders by converting their stakes into goods and services'.

The Political Theory:

The Political Theory The political model recognises that the allocation of corporate power, privileges and profits between owners, managers and other stakeholders is determined by how governments favour their various constituencies. The ability of corporate stakeholders to influence allocations between themselves at the micro level is subject to the macro framework, which is interactively subjected to the influence of the corporate sector.

Models of CG:

Models of CG

Slide 25:

Anglo American German Japanese Share holders Shareholders and employees /unions Shareholders and banks Elects Elects Elects Board of Directors Supervisory Board Supervisory Board appoints President And President Appoints Appoints Appoints Officers/Executive Management Board Executive Board Manage Manage Manage Company Company Company Indian Model = Anglo American Model +German Model

Anglo American Model:

Anglo American Model Wide spread shareholding Separation of ownership and management Professional managers Single board structure Focus on mainly on Shareholders


Contt… In the case of German model employees have a role Where as in Japanese Banks/financial institutions have a role in the board as stake holders

Investors Favorite Companies:

Investors Favorite Companies

Thanks A Lot:

Thanks A Lot

authorStream Live Help