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CHAPTER -3
Presented by- Kiran.Shetty
BGSIT

kiran.shetty763@gmail.
com

8/18/15

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Corporate governance
Introduction:
Corporate governance involves a set of relationships between a
companys management, its board, its shareholders and other stake
holders
Corporate governance also provides the structure through which the
objectives of the company are set.

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Definitions
Corporate governance can be viewed as set of arrangements internal
to the corporation that define the relationship between the owners
and managers of the corporation.
Monks and Minow(2001)- corporate governance is the relationship
among various participants in determining the direction and
performance of corporations. The primary participants are the
shareholders, the management, and the board of directors

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OECD(ORGANIZATION FOR ECONOMIC AND

CO OPERATION DEVELOPMENT)
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 corporations, such as the
board,managers,shareholders and stakeholders.

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Significance and importance of corporate

governance
Changing the ownership structure: ownership structure of the
company has been changed in the recent years. public financial
institutions,mututal funds are the single largest shareholder in most
of the large companies. They force the management to use the
corporate governance.
So they frame consumer friendly policies in order to protect all
social groups and to protect the governance.
Importance of social responsibity:
The board of directors have to protect the interest of the stakeholders
including (customers,employees,sharholders,suppliers,local
communities).
This is possible only if they use corporate governance.

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Growing number of Scams:

in recent years, many scams, frauds happening in the entire world.
Misuse of public money is happening in the financial institutions.
In order to avoid these scams many companies have started using
corporate governance.
Indifference on the part of shareholders:
in general shareholders are inactive in the management of their
companies. They only attend annual general meeting. Shareholders
associations are not strong. Directors misuse their power so in order
to curb their activity corporate governance is requried.

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Globalization: most of the companies are selling their goods in

global markets. So they have to attract foreign investor and foreign
customers. They have to follow foreign rules and foreign
regulations. Without corporate governance it is impossible to
eneter,survive and succeed in the global market.
Takeovers and Mergers:
Today, there are many takeovers and mergers in the business world.
Corporate governance is required to protect the interest of all the
parties during takeovers and mergers.
SEBI(securities exchange board of India):
SEBI has made corporate governance compulsory for certain
companies. It is done to protect the interest of the shareholders

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Benefits of corporate governance

Good corporate governance ensures corporate success and
economic growth.
Strong corporate governance maintains investors confidence, as a
result of which, company can raise capital efficiently and effectively.
it lowers the cost of capital
There is a positive impact on the share price
It provides proper inducement to the owners as well as managers to
achieve objectives that are in interests of the shareholders and the
organization.

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Good corporate governance also minimizes wastages, corruption,

risks, and mismanagement.
It helps in brand formation and its development.
It ensures an organization to manage in a manner that fits the best
interests of all.

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Two models of corporate governance

Market model or outsider (shareholder) model
Control model or insider (stakeholder) model
1. Market model:Mathematical representation of
the interaction among various participants,
economic forces, and choices made. There are
hundreds or even thousands of market models that
attempt to explain or predict the behavior of one or
more aspects of a market.

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characteristics
A priority to market regulation
The owners of firms tend to have a transitory
interest in the firm.
The absence of close relationships between
shareholders and management.
The existence of an active market for corporate
control takeovers, particularly hostile ones.
The primacy of shareholder rights over those of
other organizational groups.

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2. Control Model or insider (stakeholder)

model
The priority to stakeholder control
The owners of firms tend to have an enduring
interest in the company
They often hold position on the board of
directors or other senior managerial positions
The relationships between management and
shareholders are close and stable
There is little by way of a market for corporate
control

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OECD ON corporate governance(orgn for

economic co-operation and development)
Corporate governance is based on conducting
the business with all integrity and fairness
the following are the few points that has to be
considered
1. Rights and equitable treatment of
shareholders:orgn should respect the rights of
shareholders

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2. Interests of other stakeholders: orgn should

recognize that they have legal,contractual,social,and
market driven obligations to non shareholder
stakeholders including
employees,investors,creditors,suppliers,customers
3. Role and responsibilities of the board: the board
needs sufficient relevant skills and understanding
to review and challenge management performance

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4.integrity and ethical behavior:

Integrity should be a fundamental requirement in
choosing corporate officers and board members.
Orgn should develop a code of conduct for their
directors
5.Disclosure and transparency:
Orgn should clarify and make publicly known the
roles and responsibilities of board and
management to provide stakeholders with a level
of accountability

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Issues in corporate governance

Duties of directors: The CG(Corporate
governance) aimed to build on the director
duties as defined in statutory and case law duties
of directors.
Composition and Balance sheet of the board
Remuneration and Reward of directors
Reliability of financial Reporting and External
Auditors

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Board responsibility for Risk management and

internal control
Shareholders rights and responsibilities
Corporate social responsibility and business
ethics

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Obligation to society
CSR also known as corporate responsibility,
corporate citizenship, responsible business,
Sustainable responsible business is a form of
corporate self regulation integrated into a
business model
The below points justify the obligation towards
society

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1. Potential business benefits: the scale and nature of

the benefits of CSR of an orgn can vary depending
on the nature of the business. There is a strong
positive correlation between social/environmental
performance and financial performance.
2.Human resources:
A CSR program can be an aid to recruitment and
retention, particularly within the graduate student
market. Potential recruits often ask about a firms
CSR policy during the recruitment

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3. Risk Management: Managing risk is a central

part of many corporate strategies. Reputation
that take decades to build up can be ruined in
hours through incidents such as corruption
scandals or environmental accidents. They
minimize the risks involved in managing
governments, courts

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4. Brand differentiation:
In crowded market places, companies strive for a
unique selling propositions that can separate
them from the competition in the minds of
consumers.CSR play a vital role in building
ethical values

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5. License to operate:
Corporations keen to avoid interference in their business
through taxation or regulations. By taking substantive
voluntary steps, they can persuade governments.
6.Stakeholder priorities:
Increasingly, corporations are motivated to become
more socially responsible because their most
important stakeholders expect them to understand and
address the social and community issues that are
relevant to them.

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Obligations to investors
The principles for responsible investments
1. Address employee social governance(employee social
governance) issues in investment policy statements
2. Support development of employee social governance
related tools, metrics and analysis
3. Assess the capabilities of internal investment managers
to incorporate ESG issues
4. Assess the capabilities of external investment managers
to incorporate ESG issues.
5. Encourage academic and other research on this theme.
6. Advocate ESG training for investment professionals

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Obligation to employees, customers and

managerial obligation
1. Code of conduct
. Awareness of the areas of ethical risk
. Honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest
between personal and professional relationships.
. A culture of honesty and accountability
. Full ,fair,accurate ,timely and understandable
disclosure in reports and documents that the
company files or submits to regulators and in other
public communications made by the company.

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Compliance with applicable government

laws,rules,regulations and company policies
2.Compliance with law
the co expects all directors. Officers and employees to
comply with all applicable laws, rules and regulations
and to be able to recognize potential liabilities,
seeking legal and advice where appropriate
The co expects all directors, officers and employees to
comply with this code and all other company policies

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3. Disclosure of information:
It is the companys policy to make full, timely and
complete disclosure of important information
concerning its activities.
4.Accounting records and practicesThe companys books and records will reflect all
company transactions in an accurate and timely
manner. In particular all funds and assets will be
properly recorded

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5.Prohibited payments-Directors, officers and

employees are prohibited from paying or
accepting any bribe, kickbacks or any other
unlawful payment or benefit to secure any
concession, contract or any other favorable
treatment.Directors,officers and employees will
report any such attempted actions in accordance
with clause 14

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6. Fair dealing
Each director, officer and employee shall
Endeavour to deal fairly with the companys
customers,suppliers,competitors and employees.
No director, officer and employee is permitted to
take unfair advantage of anyone through
,manipulation, abuse of privileged information,
misrepresentation of material facts or any other
unfair dealing practice

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7. Conflicts of interest
A conflict of interest occurs when an individuals private interest
interferes in any way or even appears to interfere with the interests
of the company as a whole. A conflict arises when a director fails to
perform his basic duty or obligations
8.Corporate opportunities:
Directors, officers and employees are prohibited from a)taking for
themselves personally opportunities that are discovered through
the use of corporate property, information or position
b)Using corporate property, information of position for personal
gain.
c)Competing with the company,directors,officers and employees owe
a duty to the co to advance its legitimate interests when the
opportunity to do so arises.

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9.Use of corporate property

The co assets must not be misappropriated for
personal use by directors, officers or employees.
Directors, officers and employees shall protect
the companys assets and ensure their efficient
use.

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THANK YOU

8/18/15