CG Lecture1

8/10/2019 CG Lecture1

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Definition

According to OECD:

organization for economic corporation development)

Corporate Governance is the system by which business

corporations are directed and controlled. The corporategovernance structure specifies the distribution of rights

and responsibilities among different participants in the

corporation, such as, the board, managers, shareholders

and other stakeholders, and spells out the rules and

procedures for making decisions on corporate affairs. Bydoing this, it also provides the structure through which

the

company objectives are set, and the means of

attaining these objectives and monitoring performance.


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Another Definition

According to LaPorta et al., (2000),

Corporate governance is a set of mechanisms

through which outside investors protect

themselves against expropriation by the

insiders. They define the insiders as both

managers and controlling shareholders.


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Yet AnotherDefinition

Corporate governance refers to the direction &

oversight provided for conducting the affairs

of a corporate body

in a manner that ensures that

the individual and collective interests

of all stakeholders are served and protected.(Safdar A Butt)


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Governance and

Management

How do these terms differ?

Does Governance include Management?

Or Does Management include Governance?


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Governance & Management

Governance Function Management

Approval of Plans Planning Preparation of plans

Providing overall

leadership

Leading Leading those who

implement plans

Arranging

resources

Organizing Tasks division &

resource usage

Controlling

managers

Controlling Controlling

employees


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Governance

Strategic

Setting Objectives

Devising plans to achieve these objectives Setting rules or parameters

Not directly concerned with routine affairs

Protection of Interests of all stakeholders


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Management

Current Affairs

Implementing the Plans

Developing Suggestions and Alternatives Operational Matters


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What is a Corporate Body?

Any Company is a corporate body. However, in abroader sense only public limited companies aretaken to be the subject matter of CG.

So far the thrust of CG is only on listed companies. Greatest emphasis is on those that are controlled by

closed groups.

In USA and Europe, companies are frequently run by

minority shareholders. Hence, they require evengreater degree of CG.


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Stakeholders in a Company

Management and Employees

Lenders

Suppliers and Clients Shareholders

Society at large (this includes government)


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Classified onbasis of Rolein the Company

Classified on basis of opportunity to protect individual interests

Those withFull Opportunity

Those with aPartial Opportunity

Those withVirtually No opportunity

OwnersControllingShareholders

Institutional Investorswith Board representation

Minority and individualshareholders with no boardRepresentation

LendersFinancial institutionswith elaborate lendingContracts

Buyers of listed bondswith trustee arrangements

Other lenders

Employees Executive Directors Senior ManagersOther employeeson regular orcontract terms

Business AssociatesSuppliers who sellonly on cash terms

Major Suppliers andclients with contracts

Smaller suppliersand smaller clients

Society Government Public at large

Classification of Stakeholders


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Opportunity to protect

individual interests

Managers and Employees have the greatest

opportunity to protect their interest(s)

Suppliers and Clients essentially go by each

transaction or contract.

Lenders and Shareholders are most vulnerable.

Society depends entirely on law


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Shareholders

Controlling Groups (Internal Equity)

Outsider Shareholders (External Equity)


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Controlling Groups

I f in Majori ty:

Can protect their interest easily

Need monitoringI f in M inori ty:

Can protect their interest easily

Need highest degree of monitoring


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Outsider Shareholders

I nstitutional I nvestors

Have some means of protecting their interest

but still require protection

I ndividual or General Public

They require the greatest degree of protection,

as they have virtually no means of protectingtheir interest.


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Lenders

I nsti tutional I nvestors

Have some means of protecting their interest through

legal documentation, are relatively at lower risk but

still require protectionI ndividual or General Public

They require the greatest degree of protection, as they

have virtually no means of protecting their interest.


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Society at Large

Government (Taxes, Law and Order)

Clients (Value for money)

Community (Social Rights)

How do we ensure that these

stakeholders get their dues?


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Corporate Hierarchy

1. Shareholders

2. Board of Directors

3. Management CEO

Executive Directors

Senior Managers

4. Employees


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Key Players

Shareholders (Voting power)

Board of Directors (Represents interests)

CEO (Delegated executive powers) Senior Managers (Delegated executive powers)


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Scope of Corporate Governance

Stakeholders Objectives / interests Tools / Techniques

Shareholders Sustainable growth in net worth

General ManagementLegal frame workProfessional CodesIndustrial practices

Lenders Security / timely interest payments

Employees Continued employment at goodterms

BusinessAssociates

Continued business at good terms

Society Good citizenship by the company

Collective Interest ofall stakeholders

Continued profitable existence

Strategic ManagementRisk Management

Individ

ual

Interests

Diff B d T


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Yes-men Board

Different Board Types:

The Good, Bad, and Ugly

Rubber StampBoard

Country Club

Board

Good Old Boys

Board

The Real Thing

Paper

Board

?

Trophy Board


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Responsibilities of the Board

Oversight

Directional

Advisory


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The Oversight Function

Approving and monitoring Companys

Strategic Plans.

Approving annual budgets and plans.

Engaging outside auditors.

Ensuring integrity of financial statements

Review of major operational activities.


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The Directional Functions

Setting Mission Statement, Vision Statementand Value Statement.

Appointment of CEO / Senior Managers

Planning for succession of these managers aswell as outside directors

Appointing various committees

Prescribing code of conduct for themanagement.


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The Advisory Function

General guidance to management.

What is happening in the rest of the world.

Specialized input in certain areas


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Tools Available to the Board

Composition of the Board

Independence

Committees Incentives

External Help

Government Intervention


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Code of Corporate Governance

Constitution of Boardelement of independence

Conduct of Meetingshow, when and what

Management and Corporate Reportingcontents and

frequency Committeesso far only Audit Committee is

mandatory

External Auditor

All common sense, should be done even if notrequired by law


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Objectives of CCG

Protect the interest of all stakeholders

Infuse some independence in the Boards

Bring Transparency in conduct of meetings

Improve reliability of financial reporting

Introduce Professionalism in BoDs

Reduce undue influence of controlling groups

Develop a corporate culture

Documents

CG Lecture1