CORPORATE GOVERNANCE

&
BOARD OF DIRECTORS
Arun Chakravarthy
Lokesh Narang
Prateek Maheshwari
Rahul Pangasa
Sumit Jhawar
What is Corporate
Governance?
Corporate governance is the set of processes,
customs, policies, laws, and institutions affecting
the way a corporation (or company) is directed,
administered or controlled.
It is in accordance with the democratic spirit of the
modern day corporate practices.
Concept of Corporate Governance
(Different Perspectives)
 Monks and Minow – “Relationships among various participants
in determining the direction and performance of a corporation.”
 James D.Wolfensohnn, President of World Bank - “Corporate
Governance is about promoting corporate fairness,
transparency and accountability.”
 Standard and Poor - “the way a company is organized and
managed to ensure that all financial stakeholders receive their
fair share of a company’s earnings and assets.”
 Cadbury Committee (U.K) - “(it is) the system by which
companies are directed and controlled.”
Governance vis-a-vis
Management
Governance Management
External focus Internal focus
Assumes an open system Assumes a closed system
Strategy oriented Task oriented
Relates to where the company is to go Getting the company to the targeted goal
Job of the board of directors Job of the executives
Scope of Corporate
Governance
 Structuring of Boards
 Board Procedures
 Enhancing of shareholders’ participation,
disclosure of financial information, and fulfilling
shareholder’s rights
 Industrial Democracy
Objectives of
Corporate Governance
 Installation of a properly structured board
 Ensuring a properly balanced board
 Adoption of transparent procedures and practices
 Effective and regular monitoring of management
functioning by the board
 Disclosures to shareholders
 Exercise of effective control on corporate affairs
by the board at all times
Systems of Corporate
Governance
According to Franks and Mayer –
Outsider System
• Dominant in UK & USA
• Large Number of listed companies
• A liquid capital market
• Little concentration of shareholdings
• Relies on market and outside investors for corporate control

Insider System
• Continental Europe and Japan
• Small number of listed companies
• An illiquid capital market
• High concentration of shareholdings
Aspects of
Corporate Governance
Internal Aspects
• Set of Organizational Rules within the company.
• Sound internal processes and procedures
• Sound corporate philosophy based on ethical principles.
• Good quality leadership by the board and senior management.
• The management’s mindset imbued by vision, sense of responsibility,
respect for law and a value system
External Aspects
• Focus on profit optimisation
• Assessments of performance of the company through market mechanism
Principal activities of
Corporate Governance
DIRECTION

EXECUTIVE Principal SUPERVISION

ACTION Activities

ACCOUNTABILIITY
Historical Evolution of the Board
Constitutional Boards

Consultative Boards

Collegial Boards

Communal Boards
Corporate Boards
 Guardians of respective enterprises
 Protectors of shareholder’s interest
 Needed to control the top management
 Counsel and advice the top management
Board Structures
 All Executive Board
 Majority Executive Board
 Majority outside Board
 Two-tier board
 Supervisory Board
 Management or Executive Board
Board Objectives
 Business objectives
 Marketing related objectives
 Financial Objectives
 Technical objectives
 Compliance Objectives
 Social Objectives
 Environmental Objectives
Responsibilities of the Board
 Determination of Board functions
 Setting values, mission and vision
 Preparation of strategic plan, next year’s operating plan and
budget
 Ensuring of adequate resources
 Monitoring progress
 Preparation of a work plan
 Mentoring, monitoring and evaluating the Chief Executive
 Ensuring compliance and disclosure
 Communicating with stakeholders
Directors

Directors

Non-
Executive
executive
The Directors
 Executive Directors are those directors who
devote whole or substantially the whole of the
time in the management of the affairs of the
company.
 Non-Executive Directors are those directors who
are not involved in the day to day affairs of the
company.
Rules for composition of board
[According to clause 49 (IA)]
 Minimum 3 NEDs one of whom may be company’s
Chairman
 Non Executive Directors – Not less than 50% of the
board of directors
 If the board has non-executive chairman at least one –
third of total number of directors in the board shall be
independent directors
 If the board has an executive chairman at least 50% of
the total number of directors shall be independent
The Role of Directors
 Performance role
 Contributing know-how, expertise and information about the
external environment
 Representing the company and networking

 Conformance Role
 Judging
 Questioning the board’s assumptions
 Supervising Executive Management

 Watchdog Role
 Role of a Confidante
Responsibilities of Directors
 Responsibility to shareholders
 Duty to act honestly
 Duty not to make secret profits
 Duty to exercise reasonable care, diligence and skill in their work in the
board
 Selection, compensation, monitoring and replacement of key executives
 Review of key executives and board remunerations
 Ensuring formal and transparent nomination process
 Monitoring and managing potential conflicts of interests
 Ensuring integrity of company’s accounting and financial reporting systems
 Putting in place appropriate control systems
 Monitoring the effectiveness of corporate governance practices
 Overseeing process of disclosure and communications
Clause 49 – Corporate
Governance
 Composition of Board
 Non executive directors’ compensation and
disclosures
 Other provisions as to Board and Committees
 Code of Conduct
Fiduciary Relationship
 A fiduciary duty is a legal or ethical relationship of
confidence or trust between two or more parties,
most commonly a fiduciary or trustee and a principal
or beneficiary.
 A fiduciary is expected to be extremely loyal to the
person to whom he owes the duty (the "principal"):
he must not put his personal interests before the
duty, and must not profit from his position as a
fiduciary, unless the principal consents.
Independent Directors
 Only Non-executive director can be an
independent director for the purpose of clause
49
 Chairman -> Non Executive Director
 Non Executive Director known as Independent
Director.
 Composition = one third of board of directors
• Corporate Governance Committee
• Compliance Committee
• Share Holders Committee
• Nomination Committee
• Remuneration Committee
• Audit Committee
Board Committees