Corporate Governance


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rinoy babu


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INTRODUCTION Corporate governance includes the practices, principles and values that guide a company and its business every day. Corporate governance covers set of relationships between a company's management, its board, its shareholders and other stakeholders . It is a control measure that can result into overall economic growth and development of an economy plus will generate social justice, if implemented and executed correctly.


DEFINITION The definition of corporate governance most widely used is "the system by which companies are directed and controlled" (Cadbury Committee, 1992 ) . The OECD Principles of Corporate Governance states : " Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

Features of Corporate Governance :

Features of Corporate Governance Started as economic or financial concept Involves lot of parties Involves organizational & social objective Guiding practices, process & principles Used to motivate management to perform better Universal approach (world wide acceptance) framework of rules, relationships, systems, and processes Implemented at all levels in an organization Tool for benchmarking & controlling performance Focuses on long term value addition (profitability, goodwill, brand recognition etc.)

Importance of Corporate Governance:

Importance of Corporate Governance It creates a safe environment in front of the small investors. It promotes the in vestment habits of people by securing better return on investment . It make the management as responsible and productive. It ensures proper allocation of resources. It focuses on the stakeholders betterment. Economic development of the society through investment etc..

Objectives of good Corporate Governance:

Objectives of good Corporate Governance Strengthen management oversight functions and accountability Balance skills, experience and independence on the board appropriate to the nature and extent of company operations Establish a code to ensure integrity Safeguard the integrity of company reporting Risk management and internal control Protection of minorities Role of other stakeholders in management System of reporting and accountability Effective supervision and enforcement by regulators To encourage Sustainable Development of the Company and its stakeholders.

Parties to Corporate Governance:

Parties to Corporate Governance Board of directors Managers Workers Shareholders or owners Regulators Customers Suppliers Community (people affected by the actions of the organization)

PowerPoint Presentation:

Owner Directors Independent Directors Board of Directors Management Supervisory & enforcement authorities Shareholders Creditors Executive Directors Stakeholders Corporate

Dimension of Corporate Governance:

Dimension of Corporate Governance Business Corporate Governance CSR Effective Resource Allocation Ethical Behavior & Entrepreneurship Economic Growth

Instruments of Corporate Governance:

Instruments of Corporate Governance Followings are the instruments of corporate governance Codes Laws Principles Standards These instruments provide wider coverage and cover the following areas: Share holders rights and protection Shareholders instruments Employees and stakeholders right protection Company board responsibility Transparency of corporate structures and operations, and disclosure of it on time.

Theories of Corporate Governance:

Theories of Corporate Governance There are four theories of corporate governance The agency theory The stewardship theory The stakeholder theory The political theory

The Agency Theory:

The Agency Theory The basis for the agency theory is the separation of ownership and control. Principal (shareholders) own the company but the agents (managers) control it. Managers must maximize the shareholders wealth. The main concern is to develop rules and incentives, based on implicit explicit contracts, to eliminate or at least, minimize the conflict of interests between owners and managers.

The Stewardship Theory:

The Stewardship Theory Managers as stewards Assumed to work efficiently and honestly in the interests of company and owners. Self directed and motivated by high achievements and responsibility in discharging the duties. Managers are goal oriented Feel constrained if they are controlled by outside directors

The Stakeholder Theory:

The Stakeholder Theory Managers are responsible to maximize the total wealth of all stakeholders of the firm , rather than only the shareholders wealth.

The Political Theory:

The Political Theory The government that decides the allocation of control, rights, responsibility, profit, etc. between owners, managers, employees and other stakeholders. Each stakeholder may try to enhance its bargaining power to negotiate higher allocation in its favor.

Corporate Governance Practice:

Corporate Governance Practice Corporate governance practiced in an organization through the following manners Board of directors Audit committee Shareholders or investors grievance committee Remuneration committee Management analysis Communication Auditor’s certificate on corporate governance

Board of directors:

Board of directors The board of directors constitute the top and strategic decision body of a company. It is composed of executive and non executive directors. The board should meet frequently and all pertinent information affecting or relating to the functioning of the company should be placed before the board. Some of the significant maters are: Review of annual operating plans of business , capital expenditure budget and updates. Quarterly result of the company. Minutes of the meeting of Audit committee and other committees Materially important show causes, demands, prosecutions and penalty notice etc……

Audit Committee:

Audit Committee It is a powerful instrument of ensuring good corporate governance in the financial matters. The function of audit committee includes the following: Overseeing the company's financial reporting process and ensuring the correct , adequate and credible disclosure of financial statements. Reviewing the adequacy of the audit and compliance function , including their policies, procedures, techniques and other regulatory requirements. Recommending the appointment of statutory auditors. To review the observation of internal and statutory auditors about the findings during the audit of the company

Shareholders/Investors Grievance Committee:

Shareholders/Investors Grievance Committee Companies should form a shareholders/investors grievance committee under the chairmanship of a non executive independent director The committee is responsible for attending to the grievance of shareholders and investors relating to transfer of shares and non receipt of dividend.

Remuneration committee:

Remuneration committee The company may appoint a remuneration committee to decide the remuneration and other perks etc. of the CEO and other senior management officials as per the Companies Act and other relevant provisions.

Management Analysis:

Management Analysis Management is required to make full disclosure of all material information to investors. It should give detailed discussion and analysis of the company's operations and financial information.

Communication :

Communication The quarterly , half yearly and annual financial results of the company must be send to the stock exchange immediately after they have been taken on record by the board Some companies simultaneously post them on their website. Companies may also provide periodic event based information to investors and the public at large by way of press releases/intimation to the stock exchange.

Auditors Certification on Corporate Governance:

Auditors Certification on Corporate Governance The external auditors are required to give a certificate on the compliance of corporate governance requirements. In this certification they conclude the firm initiatives in respect of the corporate governance and they also advise the management for better corporate governance practices.

Principles of Corporate Governance :

Principles of Corporate Governance Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), The Principals of Corporate Governance (OECD, 1998 and 2004), The Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury and OECD (Organization for Economic Corporation and Development) reports present general principals around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.

Principles …….:

Principles ……. Rights and equitable treatment of shareholders : Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings. Interests of other stakeholders : Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers. Role and responsibilities of the board : The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment to fulfill its responsibilities and duties.

Principles….. :

Principles….. Integrity and ethical behavior : Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Disclosure and transparency : Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Conclusion :

Conclusion In essence good corporate governance consists of a system of structuring, operating and controlling a company such as to achieve the following: a culture based on a foundation of sound business ethics fulfilling the long-term strategic goal of the owners while taking into account the expectations of all the key stakeholders, and in particular: consider and care for the interests of employees, past, present and future work to maintain excellent relations with both customers and suppliers take account of the needs of the environment and the local community maintaining proper compliance with all the applicable legal and regulatory requirements under which the company is carrying out its activities.



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