csr13(cg) (1)
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Corporate Governance
References for Corp. Governance
Securities & Exchange Board of India,
www.sebi.org
Harvard Business Review, ‘Readings on Corporate Governance’
Academy of Corporate Governance
www.academyofcg.org
Genesis of Governance Debate
Concept originated with separation of ownership & management
Corporatisation of business and increasing scales of production
Origin can be traced back to ‘Agency Theory’ propounded by Berle & Means
Customers
Shareholders
Board of Directors
Management
Employees
Society
Suppliers
Government
Environment
Corporate Governance Tripod
Defining Corporate Governance
……. Systems, procedures and institutions that ensure that management acts in the best interests of the owners or shareholders
On going debate about whether it should be ‘shareholders’ interest or all ‘stakeholders’ interest that the management should serve
Shareholder v/s Stakeholder Debate
Debate ongoing with strong proponents on either side
Moot point is the timeframe
In the long run, interests of all are likely to converge & need to be balanced
Sustainability of the enterprise is of paramount importance
Theoratical Underpinnings
What is a Corporation?
Agency Theory
Stewardship Theory
Stakeholder Theory
Sociological Theory
Governance Systems
Systems and structures differ in historical and local condition specific context
Entrepreneurial Form
Banking Dominated Form
Managerial Form
Institutional Form
Democratic Corporate Form
Revisiting Corporate Excellence
Profitability
GrowthTop line
Bottom line
Increasing Market Share
Satisfied Stakeholders
InSearch of Excellence
Bias for Action
Closeness to Consumers
Hands on, Value Driven
Productivity through People
Autonomy & Intrapreneurship
Stick to Knitting
Built to Last
Remarkable resilience
Profit maximization not the only / primary objective
Do not brutalize themselves with the tyranny of “OR”, instead embrace genius of “AND”.
Why good governance is an imperative ?
Immediate Factors
Corporate debacles
Vanishing companies
Corporate frauds
Rating downgrades
Pending investors’ complains
Why good governance is an imperative ?Structural Factors
Globalisation of markets
Indian companies tapping international markets for resources
Institutionalisation of securities markets
CG…. International Developments
Cadbury Committee, UK 1992Baseline consensus in UK’s financial marketsFocuses on accountability & Transparency
Greenbury Committee 1995Executive’s & director’s role and compensation
Myner Committee, UK 1995 Role of institutional investors
CG…. International Developments
California Public Employees Retirement System, USA
Global governance principles
New York Stock Exchange proposals
NASDAQ proposals
CG…. International Developments
Surbanes Oxley Act, 2002Post ENRON development
Most comprehensive piece of legislation in last 70 years
Quality Review Board ( Auditor’s Independence)
Independent Directors
Whistle Blower Policy
CG…. International Developments
German ModelBanking dominated organisational form
Conservative & risk averse boards
A unique system of 2–tier boards
No official codes, but provisions in the company legislation
Of late, demand for professionalising supervisory boards
CG…. International Developments
King Committee, South Africa 1994
Bosch Report, Australia 1995
Toronto Stock Exchange guidelines 1994
Malayasian Code 1999
OECD Principles
Recognises multiplicity of economic environments
Only recommendatory in nature
Intended to assist member governments in evaluating their legal, institutional and regulatory framework
Implementation Modalities
Available options are -Thru General LegislationThrough Stock ExchangesThrough independent and well publicised ratingsThrough institutional activism and nominee directorsThrough self regulation
Implementation Choices
Most experts are averse to generally applicable standards and legal interventionInternationally, self regulation linked to openness and accountability, seems to generate maximum supportSelf regulation may not work in India, at least in the foreseeable future – A judicious mix of all the approaches may be required
CG…. Developments in India
CII’s Desirable Code of
Corporate Governance 1998
SEBI Committee I 2000
(Chair: Kumar Mangalam Birla)
SEBI Committee II 2002
(Chair: N R Narayan Murthy)
Clause 49 of Listing AgreementBoard StructureAt least 50 % of Directors to be non-executive Minimum independent directors 33 % with non-executive chairman 50 % with executive chairman
Board Procedures A minimum of 4 board meetings in a year, with a gap
not exceeding four monthsResume of directors seeking appointment / re-
appointment
Clause 49 of Listing Agreement
Mandatory Board CommitteesAudit committee
Investor’s grievance Committee
Mandatory DisclosuresDirector’s remuneration
Related Party Transactions
Penalties & Strictures
Clause 49 of Listing Agreement
Information to Shareholders
Date, time & venue of AGM
Market price data
Listing on exchanges & security code
Number of complaints, of which pending
Un-audited quarterly results & half yearly results
Demat status
Postal ballot
SEBI Committee II & Revised Clause 49
Enhance role for Audit committeeAge ceiling for directorsMaximum of 3 terms (3yrs each) for independent directorsCode of conduct & whistle blower policy mandatoryDefinition of ‘Independent directors’ – so far not defined
CG…. Developments in India
Naresh Chandra Committee 2002
Draws heavily on Sarbanes-Oxley Act of US
Independent directors – tighter definition - exemption from criminal liabilities
Auditors – barred from taking up non-audit services – audit partner rotation – cooling off period of 2 years
Professional bodies – Umbrella quality review board - Disciplinary powers with a prosecution directorate -
Unresolved Issues
Is good governance related to better competitive / financial performance ? Should board performance be evaluated ? If so by whom ?Do independent directors need to be trained ?How should independent directors be compensated ?
Corporate Governance…. a recap
Divorce of ownership & managementShareholder v/s stakeholder debateImplementation choicesClause 49 of the listing agreement
Board structure & proceduresBoard committeesDisclosuresShareholder information
CG - Road ahead
Need to graduate from compliance in letter to compliance in spirit
Co-opt softer issues on the agenda
Apply principles of good governance and accountability across sectors
Work towards national governance
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