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Corporate governance is concerned with holding the balance between economic and social goals and

between individual and communal goals.The governance framework is there to encourage the

efficient use of resources and equally to require accountability for the stewardship of those resources.

The aim is to align as nearly as possible the interests of individuals, corporations and society. The

incentive for corporations is to achieve their corporate aims and to attract investment. The incentive

for states is to strengthen their economies and discourage fraud and mismanagement. Sir

Adrian Cadbury/ 2004

Given the enormous economic power and strength of corporations around the world, and the pressing

need for all-round and inclusive development of the peoples in different geographies, it would be a great

achievement if such power could be harnessed towards such equitable and sustainable development."

Dr. Chandra IIM-B, 2008

Corporate Governance: the context

The traditional view of Corporate Governance are based on the three fundamental assumptions for the

corporations existence:

Primacy of the Shareholder

Diversity of the shareholder groups

Maximization of shareholders wealth

These are supported in mature capitalistic economies by:

Well functioning market system

Highly developed legal institutions

Ensuring checks & balances for good corporate behaviour

Corporate governance is most commonly viewed as both the structure and the relationships,

which determine corporate direction & performance.

The Board of Directors is typically central to corporate governance.

Its relationship to the otherprimary participants, typically shareholders and

management, is critical.

The authority structure of a firmlies at the heart of the issue:

who has claim to the cash flow of the firm, who has a say in its strategy and its

allocation of resources ?

It creates both the temptations for cheating and the rewards for honesty, inside

the firm

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Direction shapes Corporate Efficiency, Effectiveness& Compliance, Employee

Wellbeing and Social Responsibility

The system of checks and balances, both internal and external, which ensures that the companies

discharge their accountability to all stakeholders and act in a socially responsible way in all areas of

their business activity (Solomon & Solomon).

Much of the contemporary interest in corporate governance is concerned with

mitigation of the conflicts of interests between stakeholders.

Ways of mitigating/preventing these conflicts of interests include the processes,

customs, policies, laws & institutions which impact the way a company is controlled

Corporate Governance needs to stimulate both business prosperity and accountability to multiple

stakeholders

Corporate Governance crisis and reformis essentially cyclical:

Waves of corporate governance reform and increased regulation occur during periods of

recession, corporate collapse and re-examination of the viability of regulatory systems.

During long periods of expansion, active interest in governance diminishes, as companies

and shareholders become again more concerned with the generation of wealth, than in

its retention.

Corporate Governance: Elements...ctd

Corporate Governance applies to all types of organizations not just companies in the private

sector but also in the not for profit and public sectors

Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises

Corporate Governance is by way of legislation or best practice Code

US adopted legislation in 2002 - Sarbanes Oxley Act

Most other developed and emerging market countries have adopted best practice

Codes e.g. Combined Code in the UK, Cromme Code in Germany etc.

These codes are voluntary and operate on comply or explain approach

Corporate Governance: Elements

The environment for governance:

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International deregulation of financial markets

Increasing scale and activity of corporations

Growth of investment institutions

Effective monitoring necessary for security of investments

Recognition that governance matters for accountability, performance and attracting capital.

A general trend in society towards openness, transparency and disclosure.

The Four Pillars:

Accountability

Management to The Board & Board to Shareholders

Fairness

Protect shareholders rights and treat them equitably

Provide effective redress in event of violation(s)

Transparency & Disclosures

Ensure timely, accurate disclosure on all material matters: the financial

situation, performance, ownership & governance

Independence

Procedures and structures to minimize or avoid completely conflicts of interest

Accountability

The Cadbury Report, (UK: 1992) was the first to set out a code which companies,

though not bound to, were expected to comply with, state that in their Annual Reports

and justify three main areas of non-compliance.

The Board of Directors, auditing & shareholding

focussing attention on The Board as the principal mechanism of corporate

governance, requiring monitoring and assessment.

Auditing (and accounting) were deemed to provide the transparency and

communication with shareholders and stakeholders.

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Lastly, the report highlighted the importance of institutional shareholders as the

largest and most influential group.

This led, more than of other reforms, to the shift of Directors dialogue

towards greater accountability and engagement

Which has led to the more significant shift to corporate responsibility

towards a range of stakeholdersencouraging greater (corporate)

social responsibility.

Another area of concern, addressed by the Greenbury Report, (UK:1995) addressed

the balance between Directors remuneration and company performance.

Many other reports strengthened the framework of corporate governance: viz. the

Turnbull Report (UK: 1999)focussing attention on the system of internal controls as

was done by Treadway Commission (US: 1987)

Fairness & Independence : parties

Government Agencies & Authorities

Stock Exchanges

The Management

The Board including its Chair

The Chief Executive Officer

Other Senior & Line Managers

Shareholders

Auditors

May include influential stakeholder e.g. Creditors, Customers & (local) Community

Fairness & Independence : control

Government Agencies & Authorities and Stock Exchanges principally influence the ownership

and control structures.

Control and ownership structure refers to the types and composition of shareholders in

a corporation.

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Ownership is typically defined as the ownership of cash flow rights whereas control

refers to ownership of control or voting rights

Ownership is not control due to the existence of : dual-class shares, voting

coalitions, proxy votes, clauses in the articles of association that confer

additional voting rights to certain shareholders.

Some features or types of control and ownership structure involving Corporate Groups include

pyramids, cross-holdings, rings, and webs:

German Konzern are legally recognized corporate groups with complex structures.

Japanese Kiretsu() and South Koreanchaebol (which tend to be family-controlled)

are corporate groups which consist of complex interlocking business relationships and

shareholdings.

Cross-shareholding are an essential feature of keiretsu and chaebol groups.

Family interests dominate ownership and control structures of many corporations (Indian!).

It has been suggested the oversight of family controlled corporation is superior to that

of corporations "controlled" by institutional investors!

The significance of institutional investors varies substantially across countries:

In Anglo-American countries and Europe, institutional investors dominate the market

for stocks in larger corporations

The large pools of invested money are designed to maximize the benefits ofdiversified investments in a very large number of different corporations with

sufficient liquidity.

This strategy aims to eliminate individual firms risks. Thus, institutional

investors have relatively little interest in the governance of a particular

corporation,

the agenda of these institutional investors is primarily securitization of their

interests.

Majority of shares in the Japan are held by financial companies and corporations. Theseare not institutional investors if their holdings are largely within the group.

Fairness & Independence : Activism

Shareholder Activism: is the use of equity stake to put public pressure on management.

The goals range from financial

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increase of shareholder value through changes in corporate policy, financing

structure, cost cutting, etc.

non-financial

divestment from particular countries and/or businesses, adoption of

environmental & socially responsible policies, etc.

Shareholder activism can take any of several forms: proxy battles, publicity campaigns,

resolutions, litigation and negotiations with management.

Internet has enabled smaller shareholders to voice their opinions

Transparency & Disclosure

Transparency is operating in such a way that it is easy for others to see what actions are

performed.

Corporate Transparency is the set of information, privacy, and business policies to

improve corporate decision-making and operations openness to employees,

stakeholders, shareholders and the general public. Traditionally, the PR function is

responsible.

Within the organization, terms (depicting styles) like fish-bowl and glass wall

are gaining popularity;

Applied to the businesssociety interface, increasing use of information

communications technology has accelerated the radical increase in the

openness of organizational process and data e.g. Wiki-leaks

Disclosure implies The submission of facts and details concerning assets, situations, or operations

Companies that are publicly owned are subject to detailed disclosure laws about their

financial condition, operating results, management compensation, and other areas of

their business.

Disclosure laws are designed to protect investors through the disclosure of business and

financial information that could be considered relevant to making an investment

decision.

GAAP and specific rules of the accounting profession require that certain types

of information be disclosed in a business's audited financial statements.

Court rulings on disclosure laws indicate a movement away from the traditional "Let the buyer beware"

(caveat emptor) concept toward one of good faith and fair dealing

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Voluntary disclosure is the provision of information by a companys managementbeyond statutory

requirements and is carried out extensively by many companies.

To avoid court challenges in areas where disclosure laws are subject to interpretation,

businesses tend to err on the side of disclosing information rather than concealing it.

Voluntary disclosure benefits investors, companies and the economy; e.g. it helps

investors make better capital allocation decisions and lowers firms' cost of capital

Firms balance the benefits of voluntary disclosure against the costs, which include the

cost of procuring the information to be disclosed, and decreased competitive advantage

The extent and type of voluntary disclosure differs by geographic region, industry, and

company size.

Good Board practices & processes

Clearly defined & understood roles/responsibilities/ duties and authorities of the Board

the Directors

The Board is well structured with appropriate skill-mix

Self evaluation, retained learning & training instituted

Board remuneration in line with best practices

Control Environment

Robust internal control procedures

Risk management framework present

Disaster recovery systems instituted

Media relationship practiced

Independent auditors & internal audit committee

Transparent disclosure

Financial & non-Financial information disclosed (web based) in high quality annual

reports

Financial prepared as per International Financial Reporting Systems (IFRS)

Company Registry filings updated

Well-defined shareholder rights

Well organized shareholder meetings

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Minority shareholder rights formalized

Explicit policies on related party transactions ,extra-ordinary transactions and

dividends

Board commitment

Codes for governance & ethics widely circulated

Recognition for good governance & sustainability

Corporate Governance: Mechanism

Three internal governance mechanisms and a single external one are used in the modern corporation

The internal mechanisms are:

Ownership Concentration, represented by types of shareholders and their different

incentives to monitor managers

Governance mechanism is defined by the no. of large-block shareholders & the

percentage of shares owned

Large block shareholders: shareholders owning a concentration of at least 5

percent of a corporations issued shares

Large block shareholders have a strong incentive to monitor management closely

They may also obtain Board seats, which enhances their ability to monitor

effectively

Institutional owners: financial institutions such as stock- mutual funds and

pension funds that qualify to large block shareholder positions

The growing influence of institutional owners shapes strategy and the incentive to

discipline ineffective managers

Increased shareholder activism supported by various rulings in support of

shareholder involvement and control of managerial decisions

Shareholder Activism

Other Shareholders can convene to discuss corporations direction

If a consensus exists, shareholders can vote as a block to elect their candidates

to the board

Proxy fights

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There are limits on shareholder activism available to institutional owners in

responding to activists tactics

Board of Directors

Group of shareholder-elected individuals (usually called directors) whose primary responsibility

is to act in the owners interests by formally monitoring and controlling the corporations top-

level executives

Three director classifications - Insider, related outsider, and outsider:

Insiders: the firms CEO and other top-level managers

Related outsiders: individuals uninvolved with day-to-day operations, but who have a

relationship with the firm

Outsiders: individuals who are independent of the firms day-to-day operations and

other relationships

As stewards of an organization's resources, an effective and well-structured board of directors

can influence the performance of a firm:

Oversee managers to ensure the company is operated in ways to maximize shareholder

wealth

Direct the affairs of the organization

Punish and reward managers

Protect shareholders rights and interests

Protect owners from managerial opportunism

Executive Compensation

Governance mechanism that seeks to align the interests of top managers and owners through

salaries, bonuses, and long-term incentive compensation: stock awards and stock options Generally, thought to be excessive and out of line with performance

Factors complicating the executive compensation mechanism:

Strategic, top-level decisions are complex, non-routine and affect the firm over an

extended period, making it difficult to assess the decisions current effectiveness

Other intervening variables affect the firms performance over time

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Incentive schemes provide no mechanism for preventing mistakes or opportunistic,

myopic behavior.

Institutional investors have little/no direct interest in running of a firm

BOARD DUTIES AND FUNCTIONS: OECD Principles of Corporate Governance 2004

Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and

business plans; setting performance objectives, monitoring and implementation and corporate

performance; and overseeing major capital expenditure, acquisitions and other divestitures.

Monitoring the effectiveness of the companys governance practices and making changes as

needed.

Selecting, compensating, monitoring and, when necessary, replacing key executives and

overseeing succession planning.

Aligning key executives and board remuneration with the longer term interests of the company

and its shareholders.

Ensuring a formal and transparent board nomination and election process

Monitoring and managing potential conflicts of interest of management, board members and

shareholders, including misuse of corporate assets and abuse of related party transactions.

Ensuring the integrity of the corporations accounting and financial reporting systems, including

the independent audit and appropriate systems of control are in place, in particular systems for

risk management, financial and operational control, and compliance with the law and relevant

standards.

Overseeing the process of disclosure & communication

The single external one is:

Market for Corporate Control

This market is a set of potential owners seeking to acquire undervalued firms

and earn above-average returns on their investments by replacing (ineffective)

top-level management teams.

External governance:

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Arises from the threat of potential investors who wish to acquire a firm with the intent

or governing for better than average wealth creation

Becomes active only when internal controls have failed

Ineffective managers are usually replaced in/by takeovers

Golden handshake/ parachute

Need for external mechanisms exists to:

Address weak internal corporate governance and correct suboptimal

performance relative to competitors

Discipline ineffective or opportunistic managers

Threat of takeover may lead firm to operate more efficiently

However, changes in regulations have made hostile takeovers difficult

E.g. prevent asset stripping

Internal governance:

hinges on the ability of the board to monitor the firm's executives - is a function of its

access to information

Directors expectedly possess superior knowledge of the domain process and evaluate

top management on the quality of its decisions

The Board often look beyond the confines of financial criteria

Internal control procedures are implemented by an entity's board of directors, audit

committee, management, and other personnel to provide reasonable assurance

Balance of power: The simplest balance of power require that the President be a

different person from the Treasurer:

Single headed or shared, supportive control ?

Speed vis-a-vis Sanity!

Divergent views

UK mandates separation for balanced control,

US practice is single-headed for speed & cohesion. Expectedly, all have the same

interest in view!

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Europe practices clear separation of responsibilities with veto rights with the

Supervisors.

Japanese resort to team-worked responsibility, decision making with Leader.

Ethics

Responsibilties of Business:

Classical view: There is one and only one social responsibility of business to use its resources

and engage in activities designed to increase its profits so long as they stay within the rules of

the game, which is to say: engages in open and free competition without deception and fraud.

(Milton Freidman )

Contemporary View: A representative model was proposed by A.B. Carroll.managers have

four areas of responsibility: Economic, Legal, Ethical and Social.

Ethics:consensually accepted standards of behaviour for an occupation, trade or a profession:

Business Ethicsis considered to integrate core values like honesty, trust, respect and fairness

in a code, legally driven. Leading to:

Utilitarian approachactions and plans are judged by their consequences.

Behaviour should result in the greatest good at least cost.

Likely that some stakeholders are minimized.

Individual Rights approach - fundamental rights of humans should be respected in all

decisions.

Can get distorted (selfish) when a strong individual view-point prevails.

Justice approach - proposes that decision makers be equitable, fair and impartial for

distributing costs and benefits.

However, can lead to conflict in cases where compensatory justice is appliede.g. Reservation.

Fund managers and directors opine that preventing unethical behaviour in companies

through cold, legalistic and mechanistic means cannot alter a persons general

approach.

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Concurrently, many opine Business ethics is a contradiction in termssince ethics is

broadly defined as codes of behaviour for the benefit of society.

Morality:precepts of personal behaviour that are based on religious and/or philosophical

grounds

Leads to moral relativism that no decision is better than another given the difference

in personal interpretation.

Could lead to confusion in determining ethical behaviour; enables people to justify

behaviour as long as it is not illegal.

Law: refers to formal codes that permit or forbid behaviours and may not enforce ethics or morality

Social Responsibility:

Corporate Social Responsibility: generally refers to transparent business practices that are based on

ethical values, compliance with legal requirements, respect for people, communities, and the

environment.

Beyond making profits, companies are responsible for the totality of their impact on

people and the planet.

Increasingly, stakeholders expect that companies should be more environmentally and

socially responsible in conducting their business.

alternatively referred to as corporate citizenship, which essentially means that acompany should be a good neighbour within its host community.

Given the sea change brought about by globalization in the corporate environment, companies want to

increase their ability to manage their profits and risks, and to protect the reputation of their brands.

There is also fierce competition for skilled employees, investors and consumer

loyalty.

How a company relates with its workers, its host communities and the

marketplace can greatly contribute to the sustainability of its business.

There are many CSR organizations and business

associations promoting CSR in diverse industries - big small, and medium-sized.

CSR IEE: Integrated External Engagement:

Michael Porter and Mark Kramer summarize the result of CSR so far: a hodgepodge

of uncoordinated CSR and philanthropic activities disconnected from the companys

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strategy that neither make any meaningful social impact nor strengthen the firms long-

term competitiveness.

We are finding out quite rapidly that to be successful long term we have to ask: what do we actually

give to society to make it better? Weve made it clear to the organization that its our business model,

starting from the top. Paul Polman, CEO of Unilever

Business Sustainability

In 1983, UNWCEDUnited Nations World Commission on Environment & Development (aka

The Bruntland Commission) was set up to address growing concern with the accelerating

deterioration of the human environment and natural resources and the consequence of that

deterioration for economic and social development.

Published In 1987, the Bruntland Report gave the world the most widely used definition of

sustainable development: development that meets the need of the present without

compromising the ability of future generations to meet their own needs.

The report contains two key concepts:

The concept of needs, particularly the essential needs of the worlds poor, to which

over riding priority should be given

The idea of limitations imposed by the state of technology and social organization on

the environments ability to meet present and future needs.

The International Institute for Sustainable Development provides the variation:

For the business enterprise, sustainable development means adopting strategies that meet the

needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the

human & natural resources that will be needed in the future.

The I PAT formula was developed in the 70s to explain human consumption in terms of three

components:

population numbers,

levels of consumption (which it terms "affluence", indicative of lifestyle), and

impact per unit of resource use (which is termed "technology", because this impactdepends on the technology used)

I = P A T

The three responsibilities of Sustainability

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