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corporate governance

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Efficacy of Corporate Governance Mumbai Educational Trust – MFM Year II – (2009 - 2012)

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Project Compiled By : Roll No Team 102 Sandesh Potdar 104 Saeeda Sayed 106 Jagruti Shah 108 Shimauni Shah 110 Neeta Shringi 112 Kanay Swar 116 Vinit Tosniwal 118 Mahesh Desai 120 Esakki Muthian

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Contents 1. Definition 2. History 3. Objectives 4. Need 5. Framework 6. Principles of Corporate Governance in India World 7. Merits and Demerits of Corporate Governance 8. Impact of Violation of Corporate Governance Laws 9. Case Study – a) Satyam b) Pfizer 10. Conclusion

Corporate Governance What is Governance?:

Corporate Governance What is Governance? Purpose of corporate governance is to have a demonstrable IMPACT on a corporation’s FINANCIAL PERFORMANCE. “Corporate Governance is the application of best management practices, Compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”. The Institute of Company Secretaries of India

EVOLUTION & HISTORY :

EVOLUTION & HISTORY Series of Scams in developed economies Need for change in regulation system Act introduced such as SOX and Cadbury report Reforms taking place in India Foreign investors taking lead in capital market Vanishing PSU 1992 , Harshad Mehta scam followed by Ketan Parekh scam in stock market

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Unlike South-East and East Asia, the corporate governance initiative in India was not triggered by any serious nationwide financial, banking and economic collapse The initiative in India was initially driven by an industry association, the Confederation of Indian Industry In December 1995, CII set up a task force to design a voluntary code of corporate governance. The final draft of this code was widely circulated in 1997. In April 1998, the code was released. It was called Desirable Corporate Governance: A Code. Between 1998 and 2000, over 25 leading companies voluntarily followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI and many others EVOLUTION & HISTORY

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Objectives Transparency Efficiency Monitoring Accountability Equitable Treatment of Shareholders Self Evaluation Increasing Shareholders Wealth

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Low performance of economy Failure of PSUs – Disappearance of Companies The number of scams & frauds Growing role of market in the world Integration with Foreign Market New Business Opportunities --- IT & ITES, BPO etc . New Capital formation – FII, FDI Demand of High Performance by Investors Increased competition due to commencement of MNC Need for Corporate Governance

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Primarily concerned with administration of Companies Act 1956 and other other allied Acts It had appointed Naresh Chandra Committee on Corporate Audit and Governance in 2002 It has setup National Foundation for Corporate Governance (NFCG) in association with the CII, ICAI and ICSI as a not-for-profit Trust SEBI was established on 12 th April 1992 in accordance to the provisions of SEBI Act 1992. SEBI monitors and regulates corporate Governance of listed companies in India through clause 49 of the listing agreement. Clause 49 was introduced in 2000-2001 based on the recommendations of Kumarmangalam Birla Committee The CII has been at the forefront of the Corporate Governance movement in India In April 1998, CII “India’s Premier Business Association,” unveiled India’s first code of Corporate Governance Most of the CII Code was subsequently incorporated in SEBI’s Kumar Mangalam Birla Committee Report and thereafter in Clause 49 of the Listing Agreement.

Clause 49 - Provisions:

Clause 49 - Provisions Board of Directors – Should be an optimum combination of Executive and Non Executive Directors. In case of Non Executive Chairman, at least one third of the board should compromise of Directors In case of Executive Chairman, at least half of the board should compromise of Independent Directors Audit Committee – An audit committee shall have minimum 3 members, all being Non Executive Directors, majority of them being independent The committee shall meet at least thrice a year. The quorum shall be either two members or one third of the members whichever is higher The committee has powers to – Investigate any activity within its terms of refernce Seek information from any employee Obtain outside leagal or professional advice Secure attendance of outsiders with relevant expertise, if necessary.

Clause 49 - Provisions (Contd):

Clause 49 - Provisions ( Contd ) Remunerations of Directors – The following disclosures about Directors Remunerations should be made in the annual report All elements of remuneration package - (Salary, benefits, bonuses, stock options pention etc) Details of fixed component and performance linked incentives Service contracts ,notice period etc Stock Options details Board Procedure – The board meeting shall be held at least four times a year, with a maximum time gap of 4 months between any two meetings The directors shall not be a member in more than 10 committees or act as a chairman of more than 5 committees across all companies in which he is a Director.

Clause 49 - (Provisions Contd):

Clause 49 - ( Provisions Contd ) Management – A management discussion and analysis report should form part of annual report The discussion includes details on following matters Indutry structure and Development Opportunities and threats Segment wise or product wise performance Risks and Concerns Internal Control systems and their adequacy Outlook

Clause 49 - Provisions (Contd):

Clause 49 - Provisions ( Contd ) Shareholders – All details of appointment of a new director or reappointment of a director are to be shared with the Shareholders Quarterly results should be put up on Company’s website or should be sent to the Stock Exchange to put on its own website Redressal of Shareholder and investor complains should be undertaken by a Board Committee under the chairmanship of a Non Executive Director The Board of the company shal delegate the power of share transfer to an officer/ committee or to the registrar and share transfer agents Report on Corporate Governance – There should be a separate section on Corporate Governance in the annual reports of the company Non compliance of any mandatory requirements should be specifically highlighted Compliance – Certificate from auditors of the company

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Legal Framework Company Laws SEBI Laws Companies Act 1956 Companies Bill 2004 Section 292A (Setting up of an Audit Committee ) Section 211 (Statutory Compliance Of Accounting Standards) Securities Contract (Regulations) Act 1956 SEBI Act 1992 Depositories Act 1996

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Passed due to corporate scandals - Enron, WorldCom, Tyco Created new standards for corporate accountability and penalties for acts of wrongdoing. Formalizing and strengthening internal checks and balances Act applies to - all public companies in the U.S. and international companies that have registered equity or debt securities with the Securities and Exchange Commission and the accounting firms that provide auditing services to them. loss of exchange listing, loss of D&O insurance to multimillion dollar fines and imprisonment. fine up to $1 million and imprisonment for up to ten years. If the wrong certification was submitted "willfully", the fine can be increased up to $5 million and the prison term can be increased up to twenty years. Sarbanes-Oxley Act

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Principles of corporate governance Performance Orientation Nomination and Compensation Committees Disclosure – Ideal pattern followed by TATA Motors (Financial A/cs) Audit Committee Code of Conduct- INFOSYS COMPANY LTD . Conflicts of Interest - Wipro Ltd Environmental and Social Commitment - Wipro Ltd /Marico Conduct of the Board of Directors - PFIZER LTD . Responsibilities of Investors The Role of Directors in Turnaround Situations

Merits of Corporate Governance:

Merits of Corporate Governance Relationship with shareholders : Relationship helps to sustain business for longer period Management : Assess to outsiders on how well Corp Governance is being governed. Transparency : Attaining the Trust of stakeholders, improving access to capital & Financial markets. Benefits to Shareholders : Shareholder have greater security on Investment they have made. Informs on important decisions of managements. Benefits to National Economy : Good flow in Capital, Important factor to bring in Investment.

Demerits of corporate governance:

Demerits of corporate governance Corporation Live & die by decision of its board of directors :-sentimental business decision Family-Owned Companies : influence the decision (ex. Satyam ltd.) Easily Corruptible : lack of Govermental oversight Cost of Monitoring : need to pour money to stay in power

SATYAM COMPUTERS SERVICES LTD.:

SATYAM COMPUTERS SERVICES LTD . The company was incorporated on 24 th June 1987 as a Private Limited Co. for providing Software Development And Consultancy Services to large corporations. The company was promoted by B Rama Raju and B.Ramalinga Raju . The Company had set up two software Technology Parks, one at Mayfair Centre Secunderabad and other at Qutuballapur of Ranga Reddy Dist. of A.P. 26th August 1991 it was converted into a Public Limited Company. `

SATYAM’s NETWORK:

SATYAM’s NETWORK Satyam computer services limited is spread across 8 major cities in India. And across the globe to US, Canada, Japan, UAE , Singapore, Malaysia, Australia an European countries like Sweden , Germany, Ireland and Hungary. The man behind the bars now Mr.Ramalaingam Raju was awarded IT man of the year in 2000 by Dataquest. SATYAM computers had on Dec 16,2008 Announced that it will acquire two Groups firms, MAYTAS PROPERTIES,MYTAS INFRA. BOD of SATYAM had approved the founder proposal to buy 51% stake in Maytas infra and 100% stake in Maytas Properties. The deal is not profitable for Investors, so after this announcement they started to raise their voices against the deal.

THE SCAM:

THE SCAM Jan 7, 2009 - Black Letter Day Erosion of $2bn wealth belonging of 3 lakh shareholders Jobs of 53,000 employees at stake Drop in the networth from 8529 crore to -278 crore Role of Satyam’s auditors under scanner

THE CONFESSION:

THE CONFESSION Raju’s Version Reported Difference Areas

WHO IS TO BLAME:

WHO IS TO BLAME RAJU Audit Company PRICE WATER HOUSE COOPER. The PROMOTORS The DIRECTORS The BANK

Satyam Brand Value & Market Share:

Satyam Brand Value & Market Share

REACTION OF THE INVESTOR:

REACTION OF THE INVESTOR The shareholders realized that the buyout was not profitable for them. Satyam using there reserve cash to purchase Maytas Infra and Maytas Properties was a big risk. “Due to this their was a collapse in the price of the company’s stock and share”.

Case Study Pfizer:

Case Study Pfizer Largest pharma company in the world Headquarters in USA Presence in 45 countries of the world First company to set up Corporate Governance in 1992 15 Board of Directors on the Corporate Governance Committee Formed corporate Governance Committee to safeguard the interest of the shareholders Recognizes investors and shareholders as a crucial part of good Governance. Won Long Term Excellence Award for Corporate Governance Governance Metrics International A ward

Case Study Pfizer – Corporate Governance Commitee:

Case Study Pfizer – Corporate Governance Commitee Recommend Guide Recruit the Right Candidate Advise To make recommendations on the structure of the company. Review of shareholders right plan Review external activities Monitor emerging issues

The code of Business Conduct:

The code of Business Conduct Compliance – code of conduct/rules and regulations Disclosure of shareholdings No benefits to directors- personal or otherwise… No compete agreement Confidentiality Disclosure of waiver No Insider Trading

Case Study –Pfizer Principles :

Case Study –Pfizer Principles Right of Share Holders –Call for Special Meeting Right for Decision Making Information to Share Holders Compensation of Directors No Member of any Accounting Firm /Law Firm

PowerPoint Presentation:

Honest assessment of leader’s skills and integrity, based on questionnaire. Organizations can measure: a) Assess the right people b) Ask the right questions c) Aggregate the results 3. 360-Degree Feedback Questions for Corporate Governance a) Explicit Questions b) Culture Questions c) Requests for Comments 360-Degree Feedback - Corporate Governance Tool

Corporate mis-governance :

Corporate mis -governance

CONCLUSION:

CONCLUSION Not mere fulfillment of legal procedure will become a necessity for business Way of life Indian promoters yet to learn a lot Consumer opting for brands not products Who can serve better Corruption Need for IT infrastructure Mandatory not valuantery