Transcript L22.pptx

CORPORATE GOVERNANCE
Zeenat Jabbar
OBJECTIVES
Over the past three decades, the concept of corporate
governance has gone through a metamorphosis.
Theoretically, from one that was related to agency cost, it is
now perceived to encompass everyone’s interests. This
chapter discusses the theoretical basis, mechanisms and the
divergent models of corporate governance and culminates
in the identification of an ideal corporation.
OUTLINE














The Concept of Corporation
Theoretical Basis of Corporate Governance
Agency Theory
Stewardship Theory
Stakeholder Theory
Corporate Governance Mechanisms
Corporate Governance Systems
Indian Model of Governance
What Is Good Corporate Governance
Obligation to Society at Large
Obligation to Investors
Obligation to Employees
Obligation to Customers
Managerial Obligation
What is a Corporate?
The term “corporate” refers to an association of many persons,
who contribute money or money’s worth to a common stock
and employ it in some trade or business, and who share the
profit and loss arising therefrom. The common stocks so
contributed is denoted in money and is the capital of the
company. The persons who contribute it, or to whom it
belongs, are its members. The proportion of the capital to
which each member is entitled is his share. Shares are always
transferable, although the right to transfer them is often more
or less restricted.
What is Governance?
Governance is the process of decision making and the
process by which decisions are implemented or not
implemented.
Characteristics of a Corporation
o
Incorporated Association
o
Artificial Legal Existence
o
Perpetual Existence
o
Common Seal
o
Extensive Membership
o
Separation of Management and Ownership
o
Limited Liability
o
Transferability of shares
Theoretical Basis of Corporate Governance
o Agency Theory
o Problems with the Agency Theory
o Stewardship Theory
o Shareholder Vs Stakeholder Approaches
o Stakeholder Theory
o Criticisms of the Stakeholder Theory
o Sociological Theory
Behavioural Differences
THEORY
AGENCY
STEWARDSHIP
Managers act as
Agents
Stewards
Governance Approach
Materialistic
Sociological and
Psychological
Behaviour Pattern
o Individualistic
o Opportunistic
o Self-serving
o
o
o
Managers motivated by
Their own
objectives
Principal’s objectives
Manager’s and Principal’s
Interests
Differ
Converge
Management Structures
Monitor and
control
Facilitate and empower
Owners’ Attitude
Risk Avoidance
Risk taken
Principal – Manager
Relationship based on
Control
Trust
Collectivistic
Pro-organisational
Trustworthy
Psychological Mechanisms
PSYCHOLOGICAL
RESPONSES
Motivation
AGENCY THEORY
STEWARDSHP
THEORY
o Lower order needs
o Higher order needs
o Extrinsic needs
o Intrinsic needs
Social comparison
Compatriots
Principal
Attachment
Little attachment to Great attachment to
company
company
Power
Institutional
Personal
Situational Mechanisms
SITUATIONAL
RESPONSES
AGENCY THEORY
STEWAREDSHIP
THEORY
Management
Philosophy
Control oriented
Involvement oriented
While dealing with
increasing
Uncertainty and risk
Greater controls
More supervisions
Training and
empowering people
Making jobs to be
more challenging and
motivating
Risk orientation
Through a system of
control
Through trust
Time frame
Short term based
Long term based
Objective
Cost control
Improving
performance
Cultural differences
Individualism
Large power distance
Collectivism
Small power distance
Corporate Governance Mechanisms
o The Importance of Corporate Governance
o Contemporary Corporate Governance Situation
o Growing Awareness and Societal Responses
Corporate Governance Systems
o Anglo-American Model
o The German Model
o The Japanese Model
o Indian Model of Corporate Governance
Fig.1 : The Anglo-American Model
Shareholders
Creditors
Stakeholders
Legal/Regulatory
System
Elect
Board of Directors
(Supervisors)
Appoints &
Supervises
Own
Stake in
Monitors &
Regulates
Officers
(Managers)
Manage
Company
Fig.2 : The German Model
Shareholders
Appoint –
50%
Appoint –
50%
Supervisory Board
Appoints and
Supervises
Management Board
(Including Labour
Relations Officer)
Manage
Employees
and Labour
Unions
Company
Fig.3 : The Japanese Model
elect
Shareholders
Provides Loans
Supervisory Board
(Including President)
Ratifies the
President’s
Decisions
President
Provides Managers
Monitors & Acts in
Emergencies
Consults
Executive Management
(Primarily Board of Directors)
Manages
Main
Bank
Own
Owns
Provides Loans
Company
Fig.4 : Indian Corporate Governance Model
External Environment
Government Regulations,
Policies, Guidelines etc.
Corporate Culture, Structure,
Characteristics, Influences
Company Acts
Depositors, Borrowers,
Internal Environment
SEBI
Stock Exchanges
Customers and other
External Stakeholders
Company vision; mission, policies, norms
Internal
Stakeholders
Auditors
Board of Directors
CORPORATE
GOVERNANCE
SYSTEM
Proper governance
value
Shareholder
Corporate Governance Outcomes / Benefits to Society
Transparency
Investor protection
customer
Concern for
Healthy corporate sector development
What Is Good Corporate Governance?
Obligation to society at large
o National Interest
o Political Non-alignment
o Legal Compliances
o Rule of Law
o Honest and Ethical Conduct
o Corporate Citizenship
o Ethical Behaviour
o Social Concerns
o Corporate Social Responsibility
o Environment-friendliness
o Health, Safety and Working Environment
o Competition
o Trusteeship
o Accountability
o Effectiveness and Efficiency
o Timely Responsiveness
o Corporations Should Uphold the Fair Name of the Country
Obligation to investors
o
Towards Shareholders
o
Measures Promoting Transparency and Informed
Shareholder Participation
o
Transparency
o
Financial Reporting and Records
Obligation to customers
o Quality of Products and Services
o Products at Affordable Prices
o Unwavering Commitment to
o Customer Satisfaction
Obligation to employees
o Fair Employment Practices
o Equal-opportunities Employer
o Encouraging Whistle Blowing
o Humane Treatment
o Participation
o Empowerment
o Equity and Inclusiveness
o Participative and Collaborative Environment
Managerial obligation
o
Protecting Company’s Assets
o
Behaviour Towards Government Agencies
o
Control
o
Consensus Oriented
o
Gifts and Donations
o
Role and Responsibilities of Corporate Board and Directors
o
Direction and Management must be Distinguished
o
Managing and Whole-Time Directors
Johnson & Johnson’s excellent Credo exemplarily epitomises
what an ideal corporate should aspire to be.
Our Credo
We believe our first responsibility is to the doctors, nurses and patients,
to mothers and fathers and all others who use our products and services.
In meeting their needs everything we do must be of high quality.
We must constantly strive to reduce our costs
in order to maintain reasonable prices.
Customers' orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity to make a fair
profit.
We are responsible to our employees,
the men and women who work with us throughout the world.
Everyone must be considered as an individual.
We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs.
Compensation must be fair and adequate,
and working conditions clean, orderly and safe.
We must be mindful of ways to help our employees fulfill their
family responsibilities.
Employees must feel free to make suggestions and complaints.
There must be equal opportunity for employment, development
and advancement for those qualified.
We must provide competent management,
and their actions must be just and ethical.
We are responsible to the communities in which we live and work
and to the world community as well.
We must be good citizens – support good works and charities
and bear our fair share of taxes.
We must encourage civic improvements and better health and
education.
We must maintain in good order
the property we are privileged to use,
protecting the environment and natural resources.
Our final responsibility is to our stockholders.
Business must make a sound profit.
We must experiment with new ideas.
Research must be carried on, innovative programs developed and
mistakes paid for.
New equipment must be purchased, new facilities provided and
new products launched.
Reserves must be created to provide for adverse times.
When we operate according to these principles,
the stockholders should realize a fair return.
Johnson & Johnson
Corporate Governance in India
Problems
o
Inadequate Sanction and Enforcement.
o
No clear demarcation of control mechanisms between
SEBI, DCA and Stock Exchanges.
o
Lack of Professionalism of Directors
o
Institutional Investors show poor commitment
o
Indian boards are not professional
o
Unindependent Independent directors
o
Whistle Blower Policy not in place
o
Too many unlisted companies
o
Accounting gimmicks
o
Poor Shareholder participation
o
Obliging auditors
o
Soft State, lethargic judiciary, inefficient market regulator, poor
enforcement machinery, and a value system which is indifferent to
moral turpitudes.
However things are improving now
o
The market is competition – driven
o
Professional new players are coming in
o
High growth in market – capitalisation
o
Well-focussed, well-researched portfolio investors
o
Media influences
o
Influence of banks and financial institutions
o
Realisation among Indian companies of the benefits of corporate
governance and
o
Impending Capital Account Convertibility will exert its own pressure.