becg.l-8.cg- nature & evolution of cg
TRANSCRIPT
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Nature & Evolution of
Corporate Governance(Lesson-8: BECG)
Prof. C. Anand
Faculty IBS, Hyderabad
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Contents
This deals with:-
1. Definition of Corporate Governance (CG)
2. Nature of CG
3.
Evolution of CG4. Business Ethics and CG
5. Claims of various Stakeholders
6. Anticipating and Avoiding Unethical Consequences
7. Value Orientation of the Firm
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1. Definition of Corporate
Governance
Corporate Governance (CG) is defined as thesystems and frameworks by which organizationsare directed and controlled. CG is concernedwith standards, systems, processes, controls,
accountabilities and decision-making at the heartof, and at the highest levels of, an organization.
Good CG, and the guidance that comes with it,provides an organization with clearaccountabilities. Individual officers will have theconfidence to carry out their jobs efficiently andknow what standards are expected of them. Thisin turn leads to increased confidence in, and
respect for the work.
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CG is the system by which businesscorpoprations are directed and controlled. CGstructure specifies the distribution of rights andresponsibilities among different participants in thecorporation, such as, the board, managers,
shareholders and other stakeholders and spells outthe rules and procedures for making decisions oncorporate affairs. By doing this, it also providesthe structure through which the companyobjectives are set and the means of attaining thoseobjectives and monitoring performance..(OECD).
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1. Definition of Corporate
Governance (Contd.)
CG is the sum of those activities, which
make up the internal regulations of the
business in compliance with the obligationsplaced on the firm by legislation, ownershipand control. annonBehind the formal systems of
corporate governance lie the corevalues of an organization.
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2. Nature of Corporate Governance (CG)
CG is a set of structural arrangements that are emergingin free market economies to align the management ofcompanies with the interest of their shareholders (inparticular) and other stakeholders, and society at large.
CG addresses 3 basic issues: (i) Ethical Issues (Frauds,bribes, gifts,etc. to potential customers for achieving thegoal of maximizing long term owner value) ; (ii) EfficiencyIssues (concerned with performance of management); and(3) Accountability Issues (arising out of stakeholdersneed
for transparency of management in conduct of business.
Scope of CG: It is limited to ensuring stable income levels forshareholders.
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3. Evolution of CG
In the beginning (a few decades ago), the government wasexpected to ensure good CG and conduct. Most
shareholders believed that stringent government controls
would prevent malpractices of the corporations for fear of
punishment. However, there was soon a growing realization that Govt.
was not always the best guardian of public interest.
Shareholders began to feel the need for market driven CG
that would be more democratic and flexible. This led to thebirth of self-imposed CG within the corporate system. The
active participation of various stake holders like
shareholders, FIs, etc. have strengthened the CG
mechanism and helped to evolve beyond a set of static
rules.
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3. Evolution of CG (Contd.)
Factors that contributed to the evolution of
CG:
1. Responsibility for ensuring good corporateconduct shifted from Govt. to a free-
market economy.
2. Active participation of individual andinstitutional investors.
3. Increasing competition in global economy.
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3. Evolution of CG (Contd.)
The enhanced competition in the Globaleconomy has compelled corporations toperform better by going in for cost-cutting,
corporate restructuring, M&As, downsizing,etc. All these activities can be carried outsuccessfully only if there is proper CG.
Thus, market forces, active individual and
institutional investor participation, andenhanced competition have helped CG toevolve beyond a set of static rules.
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3. Evolution of CG (Contd.)
Evolution of CG in India:
In India, the concept of CG is still in nascent
stage. Recommendations of Kumaramangalam
Birla and CII Committees are the first steps
in India towards ensuring better CG. Prior to the above recommendations, SEBI
had taken various steps to strengthen CG in
India.
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3. Evolution of CG (Contd.)
Some of the steps of SEBI to strengthen CG:1. Strengthening of disclosure norms for IPOs
following the recommendations of Y H Malegam
Committee.
2. Providing information in directors Reports for
utilization of funds and variations between
projected and actual use of funds as per
Companies Act. (Cash Flow and Funds Flowstatements in Annual Reports)
3. Declaration of Quarterly Results
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3. Evolution of CG (Contd.)
4.Mandatory appointment of Compliance Officerfor monitoring the share transfer process andensuring compliance with various rules and
regulations.5.Timely disclosure of material and price
sensitive information (All material eventshaving bearing on performance of company)
6. Dispatch of one copy of Balance Sheet to everyHousehold and Abridged Balance Sheet to allshareholders.
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3. Evolution of CG (Contd.)
7. Issue of guidelines for preferential allotmentat market related prices
8. Issue of regulations providing for a fair and
transparent framework for takeovers andsubstantial acquisitions.
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4. Business Ethics and CG
Business Ethics:
It studies the moral
justification of economic
systems, whethernational or
international. Within a
given system it studies
the moral justification ofthe systems structures
and practices.
Corporate Governance:
It is the system by whichbusiness corporations aredirected and controlled. It
specifies the distribution ofrights and responsibilitiesamong different participantsin the corporation such as,the Board, managers,
shareholders and otherstakeholders, and spells outthe rules and procedures formaking decisions oncorporate affairs.
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5. Claims of various Stakeholders
The term Stakeholders refers to shareholders,employees, customers, suppliers, lenders andsociety at large. The primary purpose of anyorganization is to maximize the shareholder value.Paying attention to the needs and rights of all thestakeholders of a business is a useful way ofdeveloping ethically responsible behavior bymanagers. Ethical organization is one that
recognizes its responsibilities towards stakeholdersand considers their interest when taking managerialdecisions. Companies have responsibilities andobligations that extend beyond interests and needsof the shareholders.
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5. Claims of various Stakeholders
Hosmer proposed 5 managerialresponsibilities viz. Ethical, Conceptual,Technical, Functional and Operational.
Ethical responsibilities include the distributionof benefits and allocation of costs in amanner that is considered right, proper andjust by the stakeholders. Business has
responsibilities to a much wider range ofstakeholders than merely its shareholders,directors and creditors.
6 A ti i ti d A idi U thi l
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6. Anticipating and Avoiding Unethical
Consequences
Unethical Practice
(Behavior)
Impact on Decision
Maker
Likely result of the
behavior
Coercion Fear of harm
Alter decision choice
Increased product or
service quality
Deceptive Information False impression
Alter Decision choice
Reduced satisfaction.
Theft Lose resources Increased costs or
eliminate product orservice.
Bribery Unearned personal
gain
Alter decision choice
Increased Cost
Reduced product or
service quality.
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7. Value Orientation of the Firm
There is a growing recognition of the importance of
the relationship between the buyer and the seller and
the role of this relationship in aiding a firm to
become or remain competitive in todays global
market.
A firm with value orientation always tries to achieve
higher value for itself from time to time. It can be
customer-value orientation,market-value orientation
or even cultural-value orientation. A Businessscustomer- value orientation is the essence of market
orientation.
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7. Value Orientation of the Firm
Market-Value Orientation is moving less than the
organizationscultural value orientation.
Five of the most recognized cultural valuedimensions in the business literature are
individualism/collectivism, masculinity/femininity,
uncertainty avoidance, power distance, and time
orientation.