⚠ Risk Management Committee 3.
Reviews and amends investment plans
Purpose: Evaluates and advises on current and 4. Monitors actual investment returns vs plans
potential risks. 5. Regularly reviews investment strategies and capital
expenditures.
Composition:
At least 3 non-executive directors
Includes CEO and Finance Director
Members selected for risk expertise; Chair
appointed by the Board
Functions:
Reviews and implements risk policies and plans
Ensures effective risk management systems
Evaluates rm’s risk tolerance and communicates
to board
Uses key risk indicators for monitoring
Advises on risk strategies and compliance
Prepares risk management section of annual
report
Chair reports key ndings to Audit Committee and
Board
Understanding the Word ‘Corporate’ or ⚖ Corporate Governance
‘Company’
Emerged prominently after scandals like the Satyam
The term "company" originates from Latin: scam and Harshad Mehta case.
“Com” = together Triggered reforms globally (e.g., Cadbury Committee
“Pany” = bread signi es people coming together UK, Treadway Committee US).
to share a meal (association). De nitions:
De nitions: Sir Adrian Cadbury (1992): “The way in which
Chief Justice Marshall (USA, 1819): A corporation is companies are directed and controlled.”
“an arti cial being...existing only in contemplation of OECD (1999): Corporate governance de nes
law.” distribution of rights and decision-making procedures
Stewart Kyd: A corporation is a group united into in a company.
one body with perpetual succession.
Prof. Haney: A voluntary association with a separate Focus Areas:
legal identity. Accountability
Transparency
🔑 Characteristics of a Company Fairness
Registered Body – Exists only when registered Ethical decision-making
under the Companies Act.
Arti cial Juristic Person – Has no physical existence 💡 Importance of Corporate Governance
but is represented by directors.
Separate Legal Entity – Legally distinct from its Globalization – Adapting to global business
members. challenges.
Limited Liability – Members are liable only to the Economic Changes – Stability amidst economic
extent of their investment. uctuations.
Perpetual Succession – Continues to exist despite Investor Con dence – Retaining and attracting
changes in membership. stakeholders.
Reduced Mismanagement – Ethical operations reduce
🏛 Governance of a Company risk.
Governed by a Board of Directors (elected by Growth & Stability – Long-term development and
shareholders). consistency.
In some countries (e.g., Germany), a two-tier board Reputation – Builds trust and enhances corporate
exists: image.
Supervisory Board
Management Board
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Components of Good Corporate Governance 2. Stewardship Theory
- Concept: Managers are trustworthy stewards of the
Independence – Decision-making free from company and align their goals with that of the rm
external pressure. and shareholders.
Transparency – Clear, open disclosures (e.g.,
financial reports). - Key Assumptions:
Fairness – Respect for all stakeholders' rights. Managers are intrinsically motivated to act in the
Accountability – Decision-makers answerable company's best interest.
for actions. Personal success is tied to organizational success.
Responsibility – Clear role definitions and proper Empowerment is preferred over monitoring.
delegation. Non-executive directors are considered ineffective.
- Focus: Encourages trust-based governance, not
control.
3. Stakeholder Theory
- Concept: Firms should consider the interests of all
stakeholders, not just shareholders.
- Key Arguments:
Based on social contract—companies are
accountable to all stakeholders.
👥 Constituents of Corporate Governance Stakeholder engagement creates long-term value.
Board of Directors – Central governing body.
Chairman – Acts as a link between shareholders and - Criticism:
management. Vague de nition of “stakeholders”—too broad.
CEO/Managing Director – Head of executive May divert focus from core objectives by trying to
operations. please everyone.
Company Secretary – Statutory compliance of cer.
Executive Management – Heads of functional 4. Class Hegemony Theory
departments. - Concept: Major shareholders/directors (elite group)
Shareholders – Monitor board decisions, vote on dominate organizational decisions and recruit/
major issues. promote based on conformity to their group.
External Parties – Includes auditors, credit agencies,
regulators, etc. - Key Assumptions:
Elites control decision-making power.
Theories of Corporate Governance Directors are chosen based on similarity to existing
elites.
1. Agency Theory
- Concept: Focuses on the relationship between 5. Managerial Hegemony Theory
principals (shareholders) and agents (managers), - Concept: Managers, due to control over daily
where managers are entrusted with decision-making operations and inside knowledge, can dominate and
to maximize shareholder wealth. reduce the in uence of the board of directors.
- Key Assumptions: - Key Assumption:
Managers are self-interested and opportunistic. Management holds real power in practice, despite
Need governance mechanisms to control self-serving formal governance structures.
behavior.
Ef cient capital and labor markets help monitor Models of CG
management. 1. Anglo-Saxon Model (American/Shareholder
Board of directors must actively supervise managers. Model)
Countries: USA, UK, Canada, etc.
- Criticism: Focus: Maximizing shareholder value
Overemphasis on shareholders; ignores other Features:
stakeholders. 🔅 Developed and liquid stock markets
Ignores broader social, economic, and ethical aspects. 🔅 Unitary board combining executive and non-
Less relevant in non-Western cultures (e.g., Japan, executive directors
Germany). 🔅 Clear separation between ownership and
Overstates managerial self-interest. management
🔅 Strict disclosure norms and strong investor
protection
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2. German Model (Two-Tier / Continental Europe
Model)
Countries: Germany, Austria, Netherlands, etc.
Focus: Shared governance with employees (co-
determination)
Features:
🔅 Two boards: Supervisory (50% shareholders, 50%
labor) and Executive (day-to-day management)
🔅 Employee participation at board level
🔅 Banks hold signi cant voting power through
shareholding
🔅 Less developed stock market compared to Anglo-
Saxon model
3. Japanese Model (Relationship Model)
Country: Japan
Focus: Long-term relationships and stakeholder
balance
Features:
🔅 Keiretsu system with cross-shareholding among
rms
🔅 Strong involvement of banks and government
🔅 Employees play important roles in governance
🔅 Emphasis on harmony and cooperation over
competition
Art of Governance as per Kautilya’s Arthashastra
Overview:
Kautilya’s Arthashastra is an ancient treatise covering
economics, administration, politics, and governance
focused on the welfare of the people and the stability of
the state.
Key Ideas on Governance:
Good governance ensures stability through responsible
and accountable rulers.
The ruler should prioritize social welfare, helping the poor
and vulnerable.
Administration:
Administrative posts must be held by meritorious leaders
with integrity and ef ciency.
Leaders should be carefully selected through rigorous
testing and constantly monitored.
Accounts and Audit: Decision Making:
Establish a record of ce to maintain clear documentation Leaders must make fast, effective
of the kingdom’s income and expenditure. decisions without postponement.
Accountability and Rewards:
Effective Communication: High performers should be rewarded for
The ruler must be accessible and not delay or ignore the their contribution.
people’s concerns.
Open communication prevents confusion and Consumer Protection:
dissatisfaction, fostering smooth governance. The state must protect consumers from
malpractices by traders.
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