CORPORATE GOVERNANCE

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CORPORATE GOVERNANCE:

CORPORATE GOVERNANCE Pradip Singh Assistant Professor SAMS Varanasi

DEFINITION ::

DEFINITION : Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way in which a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders ) and the goals for which the corporation is governed. The principal players are the shareholders , management and the board of directors . Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

IN OTHER WORDS ::

IN OTHER WORDS : # The term corporate governance has come to mean 2 things : The processes by which all companies are directed and controlled. a field in economics, which studies the many issues arising from the separation of ownership and control.

IMPORTANT DEFINITIONS ::

IMPORTANT DEFINITIONS : " Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example , how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return", www.encycogov.com , Mathiesen [2002].

CONTINUED…:

CONTINUED… " 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 corporation, such as , the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance", OECD April 1999. OECD's definition is consistent with the one presented by Cadbury [1992, page 15].

FACTORS INFLUENCING ::

FACTORS INFLUENCING : The ownership structure of a corporation Its financial structure The structure and funtioning of the company boards The legal, political and regulatory environment within which the company operates

6 MECHANISMS ::

6 MECHANISMS :

WHY DO WE NEED MECHANISMS AND CONTROLS ::

WHY DO WE NEED MECHANISMS AND CONTROLS : Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection . For example , to monitor managers' behaviour, an independent third party (the auditor ) attests the accuracy of information provided by management to investors . An ideal control system should regulate both motivation and ability.

INTERNAL GOVERNANCE ::

INTERNAL GOVERNANCE : * Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. Monitoring by the board of directors : The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Non-executive directors are thought to be more independent , they may not always result in more effective corporate governance and may not increase performance.

CONTINUED…:

CONTINUED… Remuneration : Performance - based remuneration is designed to relate some proportion of salary to Individual performance. It may be in the form of cash or non - cash payments such as shares and share options , super annuation or other benefits. Such as incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.

EXTERNAL GOVERNANCE ::

EXTERNAL GOVERNANCE : External corporate governance controls encompass the controls external stakeholders exercise over the organisation. debt covenants Government regulations Media pressure takeovers competition managerial labour market Telephone tapping

CORPORATE GOVERNANCE ENVIRONMENT AND OUTCOMES ::

CORPORATE GOVERNANCE ENVIRONMENT AND OUTCOMES :

PRINCIPLES ::

PRINCIPLES : # Commonly accepted principles of corporate governance include: 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 effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. Interests of other stakeholders : Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.

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CONTINUED… Role and responsibilities of the board : The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person.

CONTINUED…:

CONTINUED… Integrity and ethical behaviour : Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.

CONTINUED…:

CONTINUED… Disclosure and transparency : Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders 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.

ISSUES INVOLVING CORPORATE GOVERNANCE INCLUDES ::

ISSUES INVOLVING CORPORATE GOVERNANCE INCLUDES : Oversight of the preparation of the entity's financial statements Internal controls and the independence of the entity's auditors review of the compensation arrangements for the chief executive officer and other senior executives the way in which individuals are nominated for positions on the board the resources made available to directors in carrying out their duties oversight and management of risk Dividend policy

SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE ::

SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE : Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process. Monitoring costs: In order to influence the directors, the shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.

CONTINUED…:

CONTINUED… Demand for information: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the shareholder will free ride on the judgements of larger professional investors.

Recommendations of the birla committee ::

Recommendations of the birla committee : The birla committee report is 1 st formal and comprehensive attempt to evolve a code of conduct of corporate governance. The committee felt that recommendations should be divided into mandatory and non – mandatory categories .

BASIS OF SURVEY: * INNOVATIVENESS * QUALITY AND DEPTH OF MANAGEMENT * FINANCIAL PERFORMANCE * ETHICS AND TRANSPARENCY * QUALITY PRODUCTS AND SERVICES * PEOPLE PRACTICES/TALENT MANAGEMENT * GLOBAL COMPETITIVENESS :

BASIS OF SURVEY: * INNOVATIVENESS * QUALITY AND DEPTH OF MANAGEMENT * FINANCIAL PERFORMANCE * ETHICS AND TRANSPARENCY * QUALITY PRODUCTS AND SERVICES * PEOPLE PRACTICES/TALENT MANAGEMENT * GLOBAL COMPETITIVENESS SURVEY CONDUCTED BY BUSINESS WORLD MAGAZINE :

SURVEY ANALYSIS ::

SURVEY ANALYSIS : 2006 RANK 2005 RANK RETAIL COMPANY 1 2 Shoppers’ Stop 2 4 Westside ( Trent ) 3 6 Pantaloon ( Big Bazar , etc. ) 4 1 Lifestyle 5 3 RPG Retail ( Foodworld , Musicworld ) 6 5 Crossword 7 7 Wills Lifestyle 8 8 Globus 9 N.R. Piramals ( Pyramid & Crossroads ) 10 9 Ebony

PRE – REQUISITES OF A GOOD CORPORATE GOVERNANCE ::

PRE – REQUISITES OF A GOOD CORPORATE GOVERNANCE : A proper system consisting of clearly defined and adequate structure of roles, authority and responsibility. Vision, principles and norms which indicate development path, normative considerations and guidelines and norms of performance. A proper system for guiding, monitoring, reporting and control.

REFRENCES ::

REFRENCES : * BUSINESS ENVIRONMENT – FRANCIS CHERUNILAM * ESSENTIALS OF BUSINESS ENVIRONMENT - K. ASWATHAPPA * BUSINESS WORLD MAGAZINE

THANK YOU…:

THANK YOU…

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