CORPORATE GOVERNANCE

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CORPORATE GOVERNANCE:

CORPORATE GOVERNANCE 6/5/2013 1 M4 RAJ KUMAR-232 RAHUL SPEHIA-230 DEVDUTT SHARMA-240 PALLAVI SHARMA-271 PRIYANKA DUTTA-227

CONTENTS:

CONTENTS INTRODUCTION CONCEPT OF CORPORATE GOVERNANCE DEFINITION PRINCIPLES OF CORPORATE GOVERNANCE CORPORATE GOVERNANCE THEORIES AGENCY THEORY STEWARDSHIP THEORY TRANSACTION COST THEORY SHAREHOLDER THEORY STAKEHOLDER THEORY GOOD CORPORATE GOVERNANCE 6/5/2013 M4 2

INTRODUCTION:

INTRODUCTION Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit . 6/5/2013 3 M4

CONCEPT OF CORPORATE GOVERNANCE:

C ONCEPT OF CORPORATE GOVERNANCE To work for goals of the shareholders. To maintain good relationships with all the participants of corporate body. Ethical or a moral framework to guide the decision-making process for the benefit of all the stakeholders. Corporate Governance clearly distinguishes between the owners and the managers. 6/5/2013 4 M4

Definition of Good Corporate Governance:

Definition of Good Corporate Governance The essence of governance consists of the following four principles- Transparency Accountability Justice Social responsibility SEBI- “Corporate governance is the acceptance by the management of the inalienable rights of shareholders as the true owners of the company and of their own role as trustees on behalf of the shareholders.” 6/5/2013 5 M4

PRINCIPLES OF CORPORATE GOVERNANCE:

PRINCIPLES OF CORPORATE GOVERNANCE P rinciples raised in three documents released since 1990:The Cadbury report(1992) , the Principles of Corporate Governance (OECD, 1998 and 2004 ) and the Sarbanes- O xley act of 2002 . Rights and equitable treatment of shareholders Interests of other stakeholders Role and responsibilities of the board Integrity and ethical behaviour Disclosure and transparency 6/5/2013 6 M4

CORPORATE GOVERNANCE THEORIES:

CORPORATE GOVERNANCE THEORIES Agency Theory Stewardship Theory Shareholder Theory Stakeholder Theory 6/5/2013 7 M4

AGENCY THEORY:

AGENCY THEORY Defines the relationship between the principles or promoters of a company and their agents or managers who implement the former’s brief Managers do not exactly work in the way principals plan. Agency Cost Agency theory consists of working out a way to control the agency costs. 6/5/2013 8 M4

CONTINUED:

CONTINUED Paul Milgrom and John Roberts put forward the following four principles of agency theory. Informativeness Principle Incentive Intensity Principle Monitoring Intensity Principle Equal Compensation Principle Hires Performs P A Self Interest Self Interest 6/5/2013 9 M4

CONTINUED:

CONTINUED There are two major measures through which the principal-agency problems are solved. Financial Disclosures Independent Board of Directors 6/5/2013 10 M4

STEWARDSHIP THEORY:

STEWARDSHIP THEORY The theory assumes that managers are good and trustworthy. They are appointed mainly due to their good reputation. The board of directors is generally composed of all insiders to the company, who trust their managers. Board of directors do not put vigorous disclosure methods. This is an ideal theory. 6/5/2013 11 M4

CONTINUED:

CONTINUED If it functions ethically , it will cut agency costs considerably. Religious Organizations and family enterprises adopt this trust based system. Mahatma Gandhi had advocated that the government and the industries must function on the stewardship principle. In the Asian culture , employers are held in high honour because they provide the people their livelihoods. 6/5/2013 12 M4

COMPARISON:

COMPARISON MANAGERS AS AGENT Agents of the principals Motivation lies in self-interest Function under the system of monitoring and controls Averse to risks Authority is institutionalized MANAGERS AS STEWARD Steward of the enterprise Motivation lies in common interest Function to faciliate and empower others Not averse to risks Power is an instrument to serve and preserve 6/5/2013 13 M4

TRANSACTION COST THEORY:

TRANSACTION COST THEORY Stiles and Taylor explained that ‘both transaction cost economics and agency theories are concerned with managerial discretion.’ Assumes that managers are given to opportunism and moral hazard , and managers operate under bounded rationality. Discusses how managers may be selfishly driven to undertake transactions that benefit them personally,more than the company. 6/5/2013 14 M4

CONTINUED:

CONTINUED They may also take transaction decisions without much study , as the money invested is not their personal money. Transaction cost economics is entirely dependent on the mechanisms of internal and external controls like audit control ,Information disclosure , separation of board chairmanship from CEO. This theory is based on financial economics , therfore quantification is easy. 6/5/2013 15 M4

SOCIOLOGICAL THEORY:

SOCIOLOGICAL THEORY This theory has focused mostly on board compositions and wealth distribution. The composition of the board , transparency of financial reporting , disclosure , and auditing are considered central to realizing the socio-economic objectives of corporations. The challenge lies in ensuring that absolute power is not concentrated in the hands of the board that is selected by shareholders to ensure profit maximization. 6/5/2013 16 M4

SHAREHOLDER THEORY:

SHAREHOLDER THEORY This theory stems from the conservative capitalist theory. The most important assumptions are that an individual has a complete and inalienable right to a private property and that individual liberty ensures it. Holding shares in a company are a form of a private property ownership and the shareholder alone is its rightful owner. Proponents of the theory advocate that private property is the incentive to create more wealth , and freedom is the tool for it. 6/5/2013 17 M4

STAKEHOLDER THEORY:

STAKEHOLDER THEORY Stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It was originally detailed by R. Edward Freeman in the book Strategic Management: A Stakeholder Approach Stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, financiers, suppliers, employees, and customers. 6/5/2013 18 M4

CLASSIFICATION:

CLASSIFICATION PRIMARY SOCIAL STAKEHOLDERS SECONDARY SOCIAL STAKEHOLDERS PRIMARY NON-SOCIAL STAKEHOLDERS SECONDARY NON-SOCIAL STAKEHOLDERS Investors Government and regulators Natural Environment Environmental pressure groups Employees including managers Civic institutions Future generations Animal welfare organisations Local communities Social pressure groups Non-human species Suppliers Trade bodies Other business partners Competitors 6/5/2013 19 M4

GOOD CORPORATE GOVERNANCE:

GOOD CORPORATE GOVERNANCE To maximize shareholder value ,a business must commit itself to good corporate governance. Features of good corporate governance include strategy setting and planning , risk management ,consultation ,roles and responsibilities , skills , independence and resources ,conduct and ethics , performance ,succession planning , financial and operational reporting and audit committees. 6/5/2013 20 M4

CONTINUED:

CONTINUED ROLE OF BOARD OF GOVERNORS In corporate governance , the board of governors is the highest decision-making body and it exercises threefold powers: Legislative powers Executive powers Judicial powers 6/5/2013 21 M4

PowerPoint Presentation:

6/5/2013 22 M4