CGCSR

Corporate Disclosure and Investor

protection
SEBI disclosure and investor protection Guidelines:
 Fixation and justification of issue price
 Risk Factors and Management
perception
 Industry analysis report
 Installed capacity and capacity utilisation
 Past track record and projected financial analysis
 Comparison of financial data with industry averages
 Stock Market data analysis
 Profitability Ratios
 Earning per share (EPS)
 NAV Per share
 Return on Net worth
 P/E Ratio
 Disclosure and Transparency as per
OECD principles
 Disclosure should include, but not be limited to
material information on financial and operating results
of the co. , objectives etc

 Information should be prepared and disclosed in

accordance with high quality standards of accounting
and financial and non-financial disclosure

 An annual audit should be conducted by an

independent, component and qualified, auditor in
order to provide and external and objective assurance
to the board and shareholders.
 External auditors should be accountable to the
shareholders and owe a duty to the company to
exercise due professional care in the conduct of the
audit

 Channels for disseminating information should

provide for equal, timely and cost efficient access to
relevant information by users.

 The corporate Governance framework should be

complemented by an effective approach that
addresses and promotes the provision of analysis or
advise by analysts brokers etc.
Recent Theoretical development on
corporate governance
 Agency Theory
 Stewardship theory
 Stakeholder Theory
 Sociological theory
 Agency Theory
 Roots from Adam smith who identified an agency problem
 Terms :- Principal, Agent, Agency cost and agency problem
 Principal:- Shareholders (the owners)
 Agents:- Management
 Agency problem:- the mismatch in the objectives of shareholders
and managers
 Agency cost :- The extent to which the returns to the owners fall.
 The core corporate governance is designing and putting in place
disclosures, monitoring, “oversight” and corrective systems that can
align the objectives of the two sets of players as closely as possible
and, hence, minimize agency cost.
Two broad mechanism that help reduce
agency cost and improve performance
through better governance

 Fair and accurate financial disclosure

 Efficient and independent board of
directors
 Problems with the Agency
Theory
 The total control of management is neither feasible nor required
under this theory.
 The question of its utility as a theoretical model to promote
corporate governance.
 The assumption in the trade-off that shareholders make on
employing agents is that they must accept a certain level of self-
interested behaviours in delegation responsibility to others.
 Assumption of shareholders getting correct and adequate
information to make effective control. Equity investors rarely get
these and besides they rarely make clear their exact target
returns, and yet dlegate authority to meet the target.
 Stewardship theory
 This theory assumes that managers are basically trustworthy
and attach significant value to their own personal
reputations. It defines situations in which managers are
stewards whose motives are aligned with the objectives of
their principles.
 Given a choice between self-serving behaviour and pro-
organisational behaviour, a steward’s behaviour will not
depart from the interests of his/her organisation.
 Control can be potentially counterproductive, because it
undermines the pro-oragnisational behaviour of the steward,
by lowering his/her motivation
Stakeholder Theory
 The theory synthesis of economics, behavioural science,
business ethics and the stakeholder concept.
 The theory considers the firm as an input-out put model
by explicitly adding all interest groups-employees,
customers, dealers, government and the society at large
–to the corporate mix
 It is grounded in many normative, theoretical
perspectives including ethics of care, the ethics of
fiduciary relationships, social contract theory, theory of
property rights etc.
Problems of Stakeholder theory
 Defining the stakeholder?
 Expansive list
 It is not applicable in practice by
corporations
Sociological theory
This has focus on board composition
and the implications for power and
wealth distribution in society.
Problems of interlocking directorships
and the concentration of directorships
in the hands of a privileged class are
viewed as major challenges to equity
and social progress.
Governance Orientation Matrix
Globalisation and corporate
governance
 The company should follow the governance
mechanism which will be commonly acceptable
to all over the world.
 Due to open market sys., the company should
be more careful in their operations. Any small
corruption will be known to the people since
people are now aware of their rights, and
privileges, the company’s duties and
responsibilities.
 The good governance will be a competitive
advantage for the company in the world wide
market among the competitors
Models of corporate governance
 Anglo-American Model
 German Model
 Japanese Model
 Indian Model (Mix of anglo-American)
Anglo-American model
 Also known as Unitary board model/Anglo-
Saxon model
 All directors participate in a signle board
comprising both executive and non-
executive directors in varying proportions
 Shareholder-oriented
 The basis in America, Britain, Canada,
Australia and other commonwealth
countries including India
Major Features of Anglo-American
Model
 The ownership of companies is more or less
equally divided between individual
shareholders and institutional shareholders
 Directors are rarely independent of
management
 Companies are typically run by professional
managers who have negligible ownership
stakes. There is a fairly clear separation of
ownership and management.
Major Features of Anglo-American
Model
 Most institutional investors are reluctant
activists. If they are not satisfied with the
co.’s activities they will just sell the
securities.
 Disclosure norms are comprehensive, the
rules against the insider trading tight, and
the penalties for price manipulations stiff, all
of which provide adequate protection to the
small investor and promote general market
liquidity
The Anglo American Model
- Board of Directors
Shareholders Stakeholders
(Supervisors)

Appoints &
Supervises

Officers
(Managers)

Manage Monitors and Regulates

Lien on Regulatory/Legal
Creditors System

Company Stake in
Own
German Model
 Also known as two-tier board model

 The CG is exercised through two boards, in

which the upper board supervises the
executive board on behalf of stakeholders.

 More societal oriented and is called the

continental European approach
 German Model
 Though shareholders own the company, they do
not entirely dictate the governance mechanism.
They elect 50% of members of supervisory board
and the other half is appointed by labour unions,
ensuring that employees and labourers also enjoy
a share in the governance
 The supervisory board appoints and monitors the
management board.
 Adopted in Germany, Holland and to the extent
France.
The German Model
Appoint – 50% Appoint 50%
Supervisory Board

Appoints and supervises

Management Board
Employees and
(Including Labour Shareholders
labour unions Relations Officer

Manage

Own
Company
The Japanese Model
 This is the business nerwork model
 It reflects the cultural relationships
seen in the Japanese Keiretsu
network, in which boards tend to be
large, predominantly executive and
often ritualistic.
Features of Japanese corporate
governance mechanism
 The president who consults both the
supervisory board and the executive
management is included
 Importance of the lending bank is
highlighted
The Japanese Model Provides managers,
monitors and acts in
Appoint Supervisory Board emergencies
(Including President)
Ratifies the president’s decisions Provides
managers
President
Shareholders Main Bank
Consults
Executive Management
(Primarily Board of
Directors)

Manages
Provides loans
Own Company
Owns
Common features in German and
Japanese models
 Banks and financial institutions have substantial
stakes in the equity capital of companies. Besides,
cross holding among groups of firms is common in
Japan.
 Institutional investors in both the countries view
themselves as long term investors. They play a fairly
active role in corporate managements
 The disclosure norms are not very stringent, checks
on insider trading are not very comprehensive and
effective, and the emphasis on liquidity is not high.
All these factors lead to the efficiency of the capital
market
 There is hardly any system of corporate control in
these countries; mergers and take-overs are rare
occurrences.
Indian Model Governance
 Similar to UK model
 The Indian corporates are governed by the
Company’s Act of 1956
 The pattern of private companies is mostly
that of closely held or dominated by a
founder, his family and associates.
 India has adopted the key tenets of the
Anglo- American external and internal
control mechanism after economic
liberalisation.
 Indian corporate governance model
External environment
Government regulations, Corporate culture, structure,
Depositors,
Policies, guidelines etc. Characteristics, indluences
Borrowers,
Internal Environment Customers
Company Vision, Mission,Policies,Norms and
Other
Company Act external
Auditors
SEBI Internal Board of Stakeholders
stakeholders Corporate
Stock Exchange directors
Governance
Proper governance System
Shareholder Value

Corporate governance outcomes/benefits to society

Investor protection Transparency concern for customer

Healthy corporate sector development

The important committees:
Recommended the “Best practices”
 The SEBI appointed Kumar Mangalam
Birla committee (2000)
 The Government appointed Naresh
Chandra Committee (2003)
 SEBI’s Narayana Murthy Committee
 England’s Cadbury Committee
 America’s Sarbanes-Oxley Act
Obligation to the society at a Large
 National Interest  Environment-friendliness
 Political non alignment  Healthy and safe working
environment
 Legal compliances
 Competition
 Rule of Law
 Trusteeship
 Honest and ethical
 Accountability
conduct
 Effectiveness and efficiency
 Corporate citizenship
 Timely responsiveness
 Ethical Behaviour  Corporations should uphold
 Social Concerns the fair name of the country
 Corporate Social
Responsibility
Obligation to Investors
 Towards shareholders
 Measures promoting transparency
and informed shareholder
participation
 Transparency
 Financial reporting and records
Obligation to employees
 Fair employment practices
 Equal opportunities employer
 Encouraging whistle blowing
 Human treatment
 Participation
 Empowerment
 Equity and inclusiveness
 Participative and collaborative environment
Obligation to customers
 Quality of products and services
 Products at affordable prices
 Unwavering commitment to customer
satisfaction
Managerial obligation
 Protecting company’s assets
 Behaviour towards government agencies
 Control
 Consensus-oriented
 Gifts and donations (avoid)
 Role and responsibilities of corporate board
and directors
 Direction and management must be
distinguished
 Managing and whole-time directors
Good governance model

-
 The Good Governance Model developed by
Governance International provides a new
framework for policy-makers, public managers
and community leaders who want to improve
the governance capacity of their
organisation.
 "brings together the three main elements
of governance:
(1) multiple stakeholders (2) political and
social values
(3) policy outcomes
 The Good Governance Model offers a flexible
framework which can be used in a number of
different ways:
 As a self-assessment test to develop a first
understanding of how well your organisation
manages governance issues.
 As a tool for benchmarking stakeholder
perceptions and developing a 'Governance
Balanced Scorecard'.
 As a tool for the Governance Health Check
to improve your partnership working.
Corporate Governance Mechanism
 Internal Mechanisms
 Ownership Concentration
 Board of Directors
 Executive compensation
 Multi-divisional structure
 External Mechanism
 Market for corporate control
Internal governance mechanisms
 Ownership concentration:- High relative
amounts of shares owned by individual
shareholders and institutional investors
 Board of Directors:- Individuals
responsible for representing the firm’s
owners by monitoring top-level managers’
strategic decisions
 Executive Compensation:- The use of
salary, bonuses and long term incentives to
align manager’s interests with
shareholders’ interests.
Internal mechanism
 Multi-divisional structure:- The creation
of individual business divisions to closely
monitor top-level managers’ strategic
decisions
External Governance mechanism
 Market for corporate control:- The
purchase of a firm that is
underperforming relative to industry
rivals in order to improve its strategic
competitiveness.
 Governance Mechanisms
Ownership Concentration
Large block shareholders have a strong incentive to
monitor management closely.
In Canada such shareholders account for 65% to
70% of publicly traded stocks (59% in the U.S.)

-Their large stakes make it worth their while to spend

time, effort & expense to monitor closely.

-Institutional owners are financial institutions such

as stock mutual funds and pension funds that
control large-block shareholder positions.
11-42 © 2006 by Nelson, a division of
Thomson Canada Limited.
 Governance Mechanisms
Boards of Directors
- Formally monitor & control the firm’s
top-level executives.
Set compensation of CEO & decide when to

replace
-May lackthe CEO. with day to day operations.
contact
Insiders A firm’s CEO & other top-level managers
Individuals not involved with a firm’s
Related day-to-day operations, but who have
Outsiders a relationship with the company

Outsiders Individuals independent of a firm’s

day-to-day operations and other
11-43 relationships
© 2006 by Nelson, a division of
Thomson Canada Limited.
Governance issues and national
cultures
 Changing global environment
 Globalisation
 Information technology
 Knowledge society
 Learning society
 Transnational management
 Multiple Spheres of Culture
or ‘interfaces’ (Saner)

! National/regional
Professional

Functional

Industry

Company
National Cultures
(Hofstede)

Country clusters:
 Anglo
 Germanic
 Nordic
 Latin European
 Latin America
 Arab
 ...