Corporate Governance – Introduction

 Framework for directing and controlling companies.

 Emerged in late 1980s to ensure balance, transparency, and
accountability.
 Derived from Latin “corpus” (body), focusing on company relationships
and dynamics.

Key Players in Corporate Governance

 Shareholders: Own shares; appoint board; ensure structure.

 Executive Management: Handles daily operations; reports to board.
 Board of Directors: Sets goals, supervises, ensures legal compliance.

Core Objectives

 Maximizing Shareholder Value: Enhance shareholder returns.

 Transparency & Accountability: Clear practices for all stakeholders.

Ethical Conduct

 Based on fairness, justice, integrity in business.

Notable Definitions of Corporate Governance

 Adrian Cadbury (1992): Aligns interests; focuses on accountability

and resource use.
 Cadbury Committee (1992): Defines CG as systems for
directing/controlling companies.
 Armstrong & Sweeney (2002): Definitions vary with culture and
context.
 Alawattage & Wickramasinghe (2004): Focus on laws, rules,
institutional processes.
 Bain & Band (1996): Broad view—includes management,
shareholders, employees, community.
 Claessens (2006): (Definition not fully shown in image.)
Definitions (Indian Context)

 SEBI: Defines CG as managing companies to maximize shareholder

value ethically.
 ICSI (2003): CG is a blend of law, ethics, and practices ensuring
transparency and accountability.

Importance of Corporate Governance

 Builds trust and reputation.

 Encourages foreign investment.
 Helps with resource use and risk mitigation.
 Promotes efficiency, long-term value, and public confidence.

Key Objectives

 Clarify responsibilities of management and stakeholders.

 Ensure accountability, fairness, and transparency.

Attracting Investment

 Good CG attracts local/foreign investors.

 Reduces risk and builds trust.

Ensures Efficient Resource Use

 Prevents waste, improves productivity.

Encourages Competitiveness

 Encourages ethical practices and boosts performance.

Long-Term Value Creation

 Ensures sustainable growth and long-term returns.

Builds Public Confidence

 Through transparency, integrity, and ethical governance.

Insights by Mallin (2007)

 CG supports efficiency and resource use.

Economic & Regulatory Benefits

 Promotes economic development.

 Ensures compliance with rules.

Stakeholder Confidence

 Builds trust among stakeholders.

 Encourages participation and transparency.

Addresses Global Challenges

 Global CG standards needed for cross-border investment.

 Tackles ethical and risk issues worldwide.

Advantages of Corporate Governance

1. Enhanced Trust & Reputation

 Increases confidence and brand reputation.

2. Improved Financial Performance

 Optimal resource use, access to capital, and higher returns.

3. Effective Risk Management

 Identifies and mitigates risks.

4. Better Decision-Making

 Enables strategic clarity and faster decisions.

5. Regulatory Compliance

 Ensures legal compliance and reduces legal risks.VI. Increased

Accountability & Transparency
 Clear Responsibilities: Defined roles & responsibilities.
 Transparency: Open access to decisions & operations.
 Accountability: Responsibility for actions and outcomes.

✅ VII. Sustainability & Long-Term Success

 Sustainable Practices: Long-term environmental, social, economic

focus.
 Long-Term Value Creation: Favors steady, future-oriented growth.

✅ VIII. Stakeholder Engagement

 Stakeholder Trust: Builds relationships & credibility.

 Social Responsibility: Acts in stakeholders' best interest.

✅ IX. Prevention of Corporate Scandals

 Monitoring Controls: Detects/prevents corporate misconduct.

 Ethical Conduct: Encourages ethical leadership and transparency.

✅ X. Enhanced Corporate Culture

 Promotes integrity, ethics, and positive behavior.

🌐 Principles of Corporate Governance

 Framework to guide ethics, efficiency & accountability.
 OECD principles widely accepted.

✅ Key Principles

 Transparent & Efficient Framework

 Clear Division of Responsibilities
 Shareholder Rights: Participation & protection.
  Equitable Treatment: Equal rights for all shareholders.

Role of Stakeholders
 Involves customers, employees, society.
 Ensures rights protection, sustainable practices, and
engagement.

🧾 Disclosure and Transparency

 Timely, accurate sharing of financial & operational data.

E Responsibilities of the Board

 Provides direction and strategy.
 Ensures accountability and performance.

🔍 Additional Considerations

 Audit Committees for financial oversight.

 Leadership ensures board independence and objectivity.
 Consensus Building among all stakeholders.

🔄 Theories of Corporate Governance

1. Agency Theory

 Conflict between owners (shareholders) and managers.

 Focuses on control, incentives, and reducing conflicts.
Key Points:

 Conflict of Interest
 Monitoring Mechanisms
 Incentives for Managers

2. Stewardship Theory

 Managers act as responsible stewards of company goals.

 Prioritizes trust, commitment, and long-term value.

Key Idea:

 Managers are motivated by performance, not just personal gain.

4. Theories of Corporate Governance

(Continued)
Shareholder Theory

 Focuses on maximizing shareholder wealth.

 Public Interests are secondary.
 Problems: Ignores social/environmental concerns.

Stakeholder Theory

 Considers interests of all stakeholders: customers, employees,

suppliers, etc.
 Promotes inclusive decision-making and ethical business.
🧩 5. Obligation to Investors, Customers,
Employees, Suppliers, Government, and
Society

I. Obligations to Investors

 Ensure transparency, accountability, and good returns.

Key Points:

 Transparency: Share clear, accurate info.

 Accountability: Responsible management.
 Fair Returns: Stable long-term value.
 Compliance: Follow laws and regulations.

II. Obligations to Customers

 Deliver quality, safety, and fair service.

Key Points:

 Quality & Safety: High standards.

 Fair Pricing: Honest and reasonable.
 Customer Service: Active support.
 Privacy: Data protection.

III. Obligations to Employees

 Promote welfare, fairness, and development.

Key Points:

 Fair Compensation
  Safe Work Environment
 Respect & Inclusion
 Training & Growth Opportunities

IV. Obligations to Suppliers

 Maintain ethical and efficient supplier relations.

Key Points:

 Fair Trade Practices

 Quality Standards

V. Obligations to Government

 Follow rules and support national goals.

Key Points:

 Legal Compliance
 Ethical Conduct
 Anti-Corruption
 Transparency
 Community Support

VI. Obligations to Society

 Support social development and sustainability.

Key Points:

 Social Responsibility
 Environmental Protection
 Sustainable Development
6. National Committees on Corporate
Governance
I. CII Code (1998)

 Voluntary code introduced by Confederation of Indian Industry

(CII).
 Key focus: Board, Audit Committee, Disclosure, Transparency.

II. Kumar Mangalam Birla Committee (1999)

 Formed by SEBI.
 Focus: Independent directors, board procedures, disclosures.

III. RBI Advisory Group Report (2001)

 Recommended:
o Independent Directors
o Audit Committees
o Disclosure standards
o Regulatory compliance

IV. Naresh Chandra Committee (2002)

 Focus on Audit & Governance standards.

 Suggested improvements to financial disclosure and board
practices.

V. Narayana Murthy Committee (2003)

 Formed by SEBI.
 Reforms in:
 o Audit Committee
o Accountability
o Financial Disclosures
o Board Composition

VI. J.J. Irani Committee (2005)

 Formed by Ministry of Corporate Affairs.

 Reviewed company law and suggested:
o Director responsibilities
o Corporate structure reforms
o Legal framework improvements

🧾 Summary
 Indian committees aimed at aligning governance with global
standards.
 Focus on:
o Transparency
o Ethics
o Accountability
o Independent oversight

🚨 7. Issues in Corporate Governance (India)

🔹 Lack of Board Independence:

 Many boards are dominated by promoters/family members.

 Leads to:
o Biased decisions
o Poor checks and balances
o Ineffective governance
🛑 Issues in Corporate Governance (India)
1. Ineffective Audit Committees

 Lack independence, expertise, or authority.

 Fail to monitor financial reporting properly.
 Impact: Weak oversight, less accountability.

2. Executive Compensation

 Misalignment between executive pay and performance.

 Unjustified high salaries or bonuses.
 Impact: Poor corporate health and stakeholder trust issues.

3. Regulatory Compliance & Enforcement

 Inconsistent enforcement of rules.

 Impact: Increased violations and reduced trust.

4. Disclosure and Transparency

 Delayed, partial, or manipulated disclosures.

 Impact: Investors misled; loss of confidence.

5. Shareholder Action

 Limited involvement in corporate matters.

 Impact: Reduced protection of shareholder interests.

6. Corporate Scandals and Fraud

 High-profile scams like Satyam.

 Impact: Global damage to corporate image.

7. Ethical & Cultural Challenges

 Ethics vary by region and culture.

 Impact: Unethical practices, governance gaps.
8. Board Diversity

 Lack of diverse members (gender, background, expertise).

 Impact: Narrow views, poor decision-making.

9. Implementation of Governance Codes

 Poor enforcement and awareness.

 Impact: Gaps between policy and practice.

✅ Shareholder Rights under Companies Act

2013
1. Right to Receive Share Certificates

 Within 2 months after allotment.

2. Right to Attend & Vote in General Meetings

 For shareholders listed under Section 101.

3. Right to Receive Dividends

 On shares held when declared.

4. Right to Inspect Corporate Documents

 Includes minutes, register of members, resolutions.

🟪 Shareholder Rights (Companies Act 2013)

 Right to Information – Access to financials, board reports (Sec 128,
129).
 Right to Nominate – Can nominate someone to inherit shares (Sec
72).
 Right to Accounts – Receive audited financials yearly (Sec 136).
  Right to Meetings – Request meetings with 10% shareholding (Sec
100).
 Protection from Mismanagement – Apply to Tribunal if
mismanaged (Sec 241).
 Right to Surplus Assets – Claim leftover assets after winding-up (Sec
320).
 Right to Challenge Decisions – Legally challenge wrong decisions
(Sec 245).
 Right to Preemptive Shares – Buy new shares first (Sec 62).
 Right to Vote on Resolutions – Vote on mergers, director changes
(Sec 114).
 Right to Meeting Notices – Get agenda & time notice (Sec 101).

🟪 Corporate Governance – Investor's

Perspective
🔹 Importance:

 Boosts trust, improves decisions.

 Protects rights, ensures accountability.
 Ensures transparency and fair practices.

🔹 Key Principles:

 Disclosure – Full, fair information.

 Accountability – Board answerable to investors.
 Ownership Rights – Voting and transfer rights.

🔹 Investor Rights:

 Voting, inspection, dividends.

 Legal remedies for oppression/misconduct.
🟪 Impact on Investment Decisions
 Good governance = more investment, less risk.
 Poor governance = capital withdrawal.

🟪 What Investors Watch

 Board independence
 Ethical behavior
 Performance alignment with compensation

Best Practices for Companies

 Regular reporting, disclosures, ethical practices.

 Compliance with laws and regulations.

Kotak Committee Recommendations

1. Board Composition – Mix of independent directors.

2. Separation of Roles – Chairman ≠ CEO.
3. Committees – Audit, NRC, Stakeholder Relations Committees.
4. Transparency – Clear disclosures, especially related party
transactions.
5. Shareholder Rights – Protect minority shareholder interests.
6. Voting Rights – Ensure fair and easy voting.
7. Board Evaluation – Annual performance review.
8. Risk Management – Robust framework required.
9. CSR – Report on Corporate Social Responsibility.
10. Audit & Compliance – Independent audit function.
11. Governance Reporting – Mention in annual report.

ESG (Environmental, Social & Governance)

E – Environmental
 Climate strategy, emissions, waste management.
 Focus on sustainability.