internal corporate governnance mechanism
TRANSCRIPT
-
8/2/2019 Internal Corporate Governnance Mechanism
1/27
Internal Corporate
Governance Mechanism
Presented By:
Moizur Rahman
Nausheen KhatoonNeha Thakur
Pratibha Singh
Sabiha Ahmed
Safina Zakir
Shabeena Afroz
-
8/2/2019 Internal Corporate Governnance Mechanism
2/27
-
8/2/2019 Internal Corporate Governnance Mechanism
3/27
Corporate Governance is:A relationship among stakeholders that is used to
determine and control the strategic direction and
performance of organizations.
Concerned with identifying ways to ensure that
strategic decisions are made more effectively.
Used in corporations to establish order between
the firms owners and its top-level managers whoseinterests may be in conflict.
-
8/2/2019 Internal Corporate Governnance Mechanism
4/27
Parties to Corporate Governance:
Parties involved in corporate governance include theregulatory body (e.g. Chief Executive Officer, the board of
directors, management, shareholders and Auditors). Other
stakeholders who take part include suppliers, employees,
creditors, customers, government regulations, managerial
labor market, media and the community at large.
But the main corporate governance parties:
(a) Shareholdersthose that own the company;
(b) Board of DirectorsGuardians of the Companys assetsfor the Shareholders;
(c) Managers (the agents) who are delegated to use the
Companys assets.
-
8/2/2019 Internal Corporate Governnance Mechanism
5/27
Internal Corporate Governance Mechanism:
Ownership Concentration:
Relative amounts of stock owned by individual shareholders
and institutional investors
Board of Directors:Individuals responsible for representing the firms owners
by monitoring top-level managers strategic decisions
Executive Compensation:
Use of salary, bonuses, and long-term incentives to alignmanagers interests with shareholders interests
-
8/2/2019 Internal Corporate Governnance Mechanism
6/27
Ownership Concentration:
Large block shareholders have a strong incentive to
monitor management closely.
Their large stakes make it worth their while to spend time,
effort & expense to monitor closely.
Institutional owners are financial institutions such as stock
mutual funds and pension funds that control large-block
shareholder positions
-
8/2/2019 Internal Corporate Governnance Mechanism
7/27
Boards of Directors:
Formally monitor & control the firms top- level executives.
Set compensation of CEO & decidewhen to replace the CEO.
May lack contact with day to day operations.
A firms CEO & other top-level managers
Individuals not involved with a firms day-to-day
operations, but who have a relationship with the company
Individuals independent of a firms day-to-day
operations and other relationships
Related
Outsiders
Insiders
Outsiders
-
8/2/2019 Internal Corporate Governnance Mechanism
8/27
Accountability of Board Members
Increased diversity amongst board members.
The strengthening of internal management & accounting controlsystems.
The establishment & consistent use of formal processes toevaluate boards performance.
Directors are being required to own significant equity stakes asa prerequisite to holding a board seat.
-
8/2/2019 Internal Corporate Governnance Mechanism
9/27
Executive Compensation:
Executive compensation:
A governance mechanism aligning the interests of managers
& owners through salaries, bonuses and long term incentives
such as stock options
Stock options:
A mechanism which links the executives performance to the
performance of the company.
-
8/2/2019 Internal Corporate Governnance Mechanism
10/27
An Agency Relationship exists when
-
8/2/2019 Internal Corporate Governnance Mechanism
11/27
Agency Relationship Problems:
Principal and agent have divergent interests and
goals
Shareholders lack direct control of large, publicly
traded corporations
Agent makes decisions that result in the pursuit of
goals that conflict with those of the principal
It is difficult or expensive for the principal to verify
that the agent has behaved appropriately
Agent falls prey to managerial opportunism
-
8/2/2019 Internal Corporate Governnance Mechanism
12/27
Important Corporate Committees:
1. Board of Directors:The Board is a top level managerial body of a company,
elected or appointed members who jointly oversee the activities
of a company or organization. It is headed by the Chairman
and the Managing Director. The Board may comprise 10 to15 members depending upon the size of the company.
2. Audit Committee:
It is another empowered body of the company and some of its
members may be drawn from the Board of Directors, with
a Chairperson selected from among the committee members .
an audit committee is charged with oversight of financial
reporting and disclosure.
-
8/2/2019 Internal Corporate Governnance Mechanism
13/27
3. Nomination Committee:
Nomination Committee of the Board consists of3 to 5
outstanding personalities in the field of law, businessmanagement, economics, accountancy etc. the job of this
committee is to search, locate and appoint independent
Directors on the Board of public companies lying within their
jurisdiction.
4. Remuneration Committee:
The basic purpose of forming the remuneration committee is
to establish a pay performance relationship. In other words,
the best formula for executive compensation plan must comprisea fixed component and a variable element linked to
performance parameters like turnover or EVA, profit sharing,
stock option scheme.
-
8/2/2019 Internal Corporate Governnance Mechanism
14/27
Whistle Blowers:
Whistle blowing is a procedural way to reinforce thetransparency necessary to free trapped capital, encourage
foreign investment, and move economies especially transitional
ones away from reliance on personal relationships and bribes.
Whistleblowers have drawn nearly universal praise for helping
to ensure that their employers obey the law. They performvaluable civic services by revealing information that their
employers chose to suppress.
Employees are in a unique position to uncover wrongdoing in
the workplace. They can tell more readily than governmentalinspectors whether their employers are violating safety
standards.
-
8/2/2019 Internal Corporate Governnance Mechanism
15/27
The whistleblower thus becomes the public's, and thegovernment's, only way of discovering employer misconduct.
Whistle blowing as a governance tool becomes even more
important in this context because it encourages responsive, and
thereby responsible, governance practices.
It gives individuals a say in their organization, and contributes to
a feeling of procedural justice. Giving individuals a standardized
way to speak and be heard also helps reinforce democratic ideas.
This check on power is crucial for an effective democratic
institution. Whistle blowing leads to accountability, and accountability helps
defuse the resentment and opportunities for corruption.
-
8/2/2019 Internal Corporate Governnance Mechanism
16/27
Corporate Governance Model: India
India's SEBI Committee on Corporate Governance definescorporate governance as the acceptance by management of the
inalienable rights of shareholders as the true owners of the
corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical
business conduct and about making a distinction betweenpersonal & corporate funds in the management of a
company.
It has been suggested that the Indian approach is drawn from theGandhian principle of trusteeship and the Directive
Principles of the Indian Constitution, but this
conceptualization of corporate objectives is also prevalent
in Anglo-American and most other jurisdictions.
-
8/2/2019 Internal Corporate Governnance Mechanism
17/27
Governance Mechanism & Ethical Behavior:
Shareholders are recognized as a companys most significantstakeholders.
The minimum interests or needs of all stakeholders must be
recognized through the firms actions.
A firms strategic competitiveness is enhanced when itsgovernance mechanisms take into consideration the interests of all
stakeholders.
Only when the proper corporate governance is exercised can
strategies be formulated & implemented that will help the firmachieve strategic competitiveness & earn above average returns.
-
8/2/2019 Internal Corporate Governnance Mechanism
18/27
Case Study: The Satyam Scanda
-
8/2/2019 Internal Corporate Governnance Mechanism
19/27
Chairman of
Satyam resigns:
On January 7th 2009, B.
Ramalinga Raju, Founder
and Chairman ofSatyam
Computer Services,
resigns amid a scandal over
a billion dollar fraud that
sends shock-waves
throughout the globe
The incident throws a
spotlight on Corporate
Governance in India-based
companies
-
8/2/2019 Internal Corporate Governnance Mechanism
20/27
The Satyam Growth Story:
Founded in 1987, Satyam hadepitomized Corporate India and its
emergence as an powerhouse in the
global IT industry. Satyam built its
business around 3 areas, namely ITservices, Business Process
Outsourcing (BPO) and Software
Products
With over 50,000 employees across the
global, Satyam became Indias 4th
largest IT services company. Almost
one in every two of the Fortune 500
was said to be a client of Satyam
-
8/2/2019 Internal Corporate Governnance Mechanism
21/27
Corporate Earnings:
In the financial year ending
March 2008, Satyam reported an
impressive 46.3% rise in
revenue to $2.1 billion
In October 2008, Satyam said
revenue would rise a further
20% in the 2009 financial year
Such statements were, of course,
later found out to be fictitious
-
8/2/2019 Internal Corporate Governnance Mechanism
22/27
Letter to the Satyam Board:
In a letter to the Satyam Board,
Raju publicly admits to having
overstated Satyams profits over
a period of several years to the
tune ofapproximately US$1
billion
In his letter, Raju states he acted
alone, but questions are
immediately raised about theinvolvement of others, including
Satyams auditors,
PriceWaterhouse
-
8/2/2019 Internal Corporate Governnance Mechanism
23/27
Relentless Pursuit to be No.1
With the ever-increasing pressureto perform, Satyam was keen to
catch-up to its key competitors,
Tata Consultancy Services,
Infosys Technologies and Wipro
The relentless pursuit to be No.1
led Satyam to over-inflate its
profits over the years until the gap
became so wide it was, in Rajusown words like riding a tiger, not
knowing how to get off without
being eaten
-
8/2/2019 Internal Corporate Governnance Mechanism
24/27
The Maytas Incident:
In an attempt to cover-up Satyams
US$1 billion worth offictitious
assets with real assets, Satyam
attempted to acquire Maytas
Infrastructure and Maytas
Properties, companies controlled bythe Raju family that owned land
reportedly worth around US$1
billion
However, the acquisition was
dropped when Satyam shareholders
protested, questioning why such an
acquisition was needed
-
8/2/2019 Internal Corporate Governnance Mechanism
25/27
The Investigation:
Indias Central Bureau ofInvestigation inquiry into the
Satyam scandal suggest falsified
accounting on a massive scale
Their report highlights the
involvement ofdual accounting
books, thousands of forged
invoices, fake bank statements, and
thousands of unnecessary employeesand auditors who received fees
several times the market rate
-
8/2/2019 Internal Corporate Governnance Mechanism
26/27
Indias Enron:
Charges of cheating, forgery
and falsification of accounts
have been filed against Raju,
two of his brothers and four
other Satyam Executives
Satyam has since been acquired
by Tech Mahindra
The incident has been dubbed
Indias Enron and has put a
blot on Indias Corporate
Landscape
-
8/2/2019 Internal Corporate Governnance Mechanism
27/27
Thank You !!!