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II MBA IV Sem Dec 07

MMBA 401RO3

Corporate Ethics and Governance


Unit I Understanding CG

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Stakeholder Economics
For the long term sustainability of the corporation, it has to have long-term close relationships not only with employees but also with clients, customers, suppliers and the local community. This means that the interests of various stakeholders need to be taken into consideration by the management of the corporation, which is a public concern. A corporation therefore does not belong solely to the shareholders (Hiroshi Okuda, Toyota Chairman, 2001)
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Corporations are under fire. Hardly a day goes by that executive conduct doesnt appear as a topicor, more accurately, as a problemin the media. This leads to increased public pressure on corporations, many of whom are reacting and publicly assuming their corporate responsibility. Strict profit-maximization cannot be a legitimate principle of corporate conduct, since it discards the moral self-commitment from the start, -Ulrich
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Corporate ethics and governance

A business that makes nothing but money is a poor kind of business


After years of diligent scientific efforts aimed at finding a satisfactory, conclusive answer to this fundamental question, companies have begun to implement various approaches in practice. The question is no longer whether, but how economics and ethics can be united.
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Corporations and their executive committees have found various answers, ranging from philanthropic approaches to strategic positioning and institutionalized implementations. .The proper governance of companies will become as crucial to the world economy as the proper governing of countries. James D. Wolfensohn, President of the World Bank c. 1999
Corporate Governance is the system by which companies are directed and controlled. Cadbury Report c. 1992 Whilst management processes have been widely explored, relatively little attention has been paid to the processes by which companies are governed. If management is about running businesses, governance is about seeing that it is run properly. All companies need governing as well as managing. Professor Bob Tricker c. 1984
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The best chance you have of making a big successis to decide from square one that you are going to do it ethically - Alan Greenspan Chairman, Federal Reserve Board There is no such thing as business ethics.Theres just ethics; and we all have to practice them every day in everything we do. Peter Drucker
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Importance of Ethics

Questions for Companies


what are the kinds of impact which companies in various sectors can have on poverty? what kinds of activity constitute best practice in this area? is a company aware of its impact? is it doing something about it? if not, what are the issues the company needs to face, and what can we say to them about what is being done by other companies in the sector?
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Why Governance?

Greek Origin - kubernetes = the steersman; and cybernetics = the connectedness and feedback from systems appears in Middle English C13th from Old French gouvernance (Geoffrey Chaucer) mentioned in C16th texts including Machiavellis Prince minor reference in Adam Smiths The Wealth of Nations re-appears in Harold Wilsons The Governance of Britain 1984 Bob Trickers Corporate Governance published 1992 Adrian Cadburys Report for UK (postMaxwell) 2001 Enron and beyond - is governance a fashion 4/2/2014 8 item?

International agencies such as OECD, World Bank, IMF, European Union and CACG are advocating more effective Corporate Governance. The dimensions of the present international debate revolve around:

Shareholder Focus ------- Stakeholder Focus Private Sector Focus ------- Public Sector Focus One Size Fits All ------- One Value Set Fits All
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OBJECTIVE OF CORPORATE GOVERNANCE a) TO BUILD UP AN ENVIRONMENT OF TRUST AND CONFIDENCE AMONGST THOSE HAVING COMPETING AND CONFLICTING INTEREST b) TO ENHANCE SHAREHOLDERS VALUE AND PROTECT THE INTERESTS OF OTHER STAKEHOLDERS BY ENHANCING THE CORPORATE PERFORMANCE AND ACCOUNTABILITY .

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CORPORATE GOVERNANCE ULTIMATE OBJECTIVE


TO ATTAIN HIGHEST STANDARD OF PROCEDURES AND PRACTICES FOLLOWED BY THE CORPORATE WORLD SO AS TO HAVE TRANSPARENCY IN ITS FUNCTIONING WITH AN ULTIMATE AIM TO MAXIMISE THE VALUE OF VARIOUS STAKEHOLDERS.

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Purpose of Corporate Governance - Good Corporate Trust - Governance - To build and strengthen: Accountability Credibility Transparency Integrity - Ethical standards - Reputation
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Evidence: Good corporate governance enhances shareholder value Governance and Shareholder Returns University of Michigan Business School Firms with profitable investment opportunities and with more reliance on external financing have higher quality corporate governance, and firms with higher corporate governance ratings are valued higher.
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Business Week
The stocks of companies with the best boards outperformed those with the worst boards by 2 to 1. But as the economy slowed...the Best Boards companies retained much more of their value, returning 51.7%, vs. 12.9% for the Worst Boards companies.
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McKinsey & Company An overwhelming majority of investors is prepared to pay a premium for companies exhibiting high governance standards. This applies to companies in every country of the world. Columbia Law Review ... corporations with active and independent boards appear to have performed much better in the 1990s than those with passive, nonindependent boards.
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Journal of Economics We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures and made fewer corporate acquisitions.

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Benefits of Corporate Governance Good Corporate Governance Better reputation Investor interest rising Share prices increase Reduction of legal risk

Trust

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WHAT IS CORPORATE GOVERNANCE


PROCESSES AND STRUCTURE BY WHICH BUSINESS AND AFFAIRS OF CORPORATE SECTOR IS DIRECTED AND MANAGED.

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 effectively used in corporations to establish order between the firms owners and its top-level managers
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Corporate Governance is the system by which companies are directed and managed. Corporate Governance influences: -how objectives of the company are set -how risk is monitored -how performance is optimized
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--- deals with problems that result from the separation of ownership from control. Would focus on ; > the internal structure and rules of the board, > the creation of audit committees > rules for the disclosure of information to shareholders and creditors; > transparency of operations and an impeccable process of decision making; and > control of management
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deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers?
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Understanding corporate governance


> capitalism at cross roads US crisis of credibility of popular corporations since 2000. exposures of widespread accounting irregularities and fraudulent practices. > SEC set up under the New Deal to combat the great Depression inadequately equipped to deal with gigantic corporations such as Xerox, Enron, Worldcom that committed huge frauds to show inflated profits fudge account to show unearned profits. > Failure of the auditing firms business ethics an oxymoron?
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History / Background
Being managers of other peoples money but their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which [they] frequently watch over their own. Negligence and profusion, therefore, must always prevail more or less in the management of the affairs of a company. Adam Smith, Wealth of Nations (1776). control will tend to be in the hands of those who select the proxy committeeSince the proxy committee is appointed by the existing management, the latter can virtually dictate their own successors Berle and Means (1932) on 4/2/2014 23 Director Elections

Corporate governance discussion is a reaction to recent accounting and corporate governance scandals in the financial markets Regulations such as the US Sarbanes-Oxley Act and the Swiss Code of Best Practice for Corporate Governance reflect sweeping reforms in: Corporate responsibility Auditor oversight and independence Enhanced disclosure Additional civil and criminal liabilities and sanctions - Trust
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Collapse of American mega corporations during the early 2000s - WorldCom improperly booked $3.8 bln to inflate profits; its founder Bernie Ebbers, borrowed $408mln borrowed from the phone co to cover personal debts. - The energy firm, Enron, created outside partnerships to hide poor financial performance. Executives earned millions of Dollars selling co stock. bankruptcy its auditors, Andersen was accused of shredding Enron documents and was convicted of obstruction of justice. - Dynergy, another energy firm, was investigated for accounting and trading malpractices, related to 4/2/2014 25 California power crisis.

Executives of the garbage co, Waste Management were sued for accounting fraud - auditors Arthur Andersen. Adelphia Communications made illegal loans to founder Rigas family members and was under SECs investigation for accounting malpractices. Tyco chief executive was accused of dodging sales tax on purchase of artwork for his NY residence. The Chief Executive of Imclone Systems was accused of insider trading after the cos drug application got rejected . The software co Peregrine Systems said that it had overstated its revenue by $100mln for 3 yrs. 3 executives of Rite Aid were indicted for accounting irregularities and fraud. 4/2/2014 26

The Sarbanes-Oxley Act stipulated that the CEOs and CFOs of big cos should swear before a notary that their annual and quarterly reports contain no untrue statement and have not omitted any material fact. They should also certify the truthfulness of the accounting statements and annual reports must assure that they meet the internal controls relating to the circulation of material information means that the officials also will be liable for criminal and civil suits for omissions and false statements. 4/2/2014 27

Institutional investors, as they seek to deploy internationally the massive funds they represent, are insisting on high standards of corporate governance in companies in which they invest. In a number of cases, these institutions have set their own corporate governance standards as a measure for determining their investment decisions. Public attention through high profile corporate scandals and collapses has forced governments, regulators and boards of corporations to carefully reconsider fundamental issues of corporate governance as essential for public economic interest. In addition, the volatility and instability experienced in emerging markets in recent times has drawn attention to the implications of corrupt practices and maladministration in national and international financial systems and on public expenditure.
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Experiences of public sector reform and privatisation in many countries have set demands on state-owned enterprises and government agencies to address standards of integrity expected of the public service. Other interesting developments in corporate governance include the rise of ethical investors requiring corporations to pay increasing attention to the social role of business, notably in the areas of environment, health and safety, ethnic and community relations. More and more corporations are adopting social auditing standards in dealing with such matters as the ethical sourcing of products from developing countries and the treatment of communities in which they operate.
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Misgovernance in India
Since 1947; - feudalistic - political system pseudo-democratic - businesses thrived on unethical practices in the market place, - scant regard for traditional values of honesty, etc. - corruption at all levels - costs of misgovernance in public sector enterprises passed on to consumers - private sector enterprises indulged in all malpractices to fleece consumers.
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Scams that shook investor confidence 1992- Harshad Mehta involved many banks and the stock market investors lost nearly Rs5000cr. 1993 94 stock market rose by 120%. During this boom, 3911 cos that raised over Rs 25000cr., vanished or did not set up their projects gullible investors lost a lot of money because during the artificial boom hundreds of obscure cos were allowed to make public issues at large share premia through high sales pitch of questionable investment banks and 4/2/2014 31 misleading prospectuses.

1995-96 Rs50000 cr mopped from gullible public by plantation cos. 1995-97 non banking finance cos scam - more than rs 50000 cr vanished from the investors. 1995-98 MFs scam public sector banks raised more than Rs 15000 cr promising huge returns, but al flopped. another scam in which BPL, Sterlite and Videocon price rigging involving H.Mehta. 2001 Ketan Parekh resorted to price rigging with a bear cartel .
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Illegal tactics of Indian cos; Pollution control, avoidance of child labour, etc are looked upon as measures to improve sustainability of operations of corporates rather than mere good behaviour issues. Other malpractices; > cornering of industrial licences to preempt competitors, > using import licences to make quick profit, > iIlegally holding money abroad to meet business expenses and investments for which govt would not allow enough funds, > gain special advantages for the business through bribery, unaccounted money to compensate for penal taxes, political donations, etc. 4/2/2014 33

Tax evasion due to expropriatory tax levels avoid by paying high salaries to executives overseas holidays for the families as business trips, expensive residences shown as in office use, cars for personal use shown as being used for work, furniture and furnishings, clothing, food and most household expenses being met by the co for employees became common practices for cos which promised to be honest otherwise. The need for corporate governance became urgent initiated by private sector- different from the UK and the US where the drivers of corporate governance were the shareholders groups, activist funds and self regulatory bodies within the capital markets, in South East and East Asia it was the result of conditions imposed by the IMF and the WB, in the wake of the collapse of the Financial Markets in 1997-98. India launched its corporate governance movement in 1997, 34 -4/2/2014 there was no BOP crisis

Reasons for misgovernance in India


> closed economy > sheltered market > limited need and access to global markets > lack of competitive spirit > an ineffective regulatory framework For more than 40 yrs since the adoption of Socialistic Pattern of Society > family controlled businesses only 3.3% of the shareholdings with the founding families far of reforms compulsion of market forces LPG, WTO compulsions.
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Increasing awareness; DCA, ICSI, CII, FICCI, SEBI, AMFI, etc. - conferences on corporate governance; ICICI Bank has an internal corporate governance for the past 10 yrs. CG movement began in 1997 in India voluntary code framed by the CII in 3 yrs, more than 30 cos with about 25% of market capitalisation voluntarily adopted the code . 1990 SEBI set up KM Birla Committee on CG to mandate international standards of CG for listed cos. 2001 over 140 listed cos accounting for 80% of market capitalisation covered . 4/2/2014 36 2003, all listed cos covered by the Code.

Change in mindset since 1991 old players replaced by new breed as a result of reforms competition and dismantling of controls reduced entry barriers professional managers cos run transparently sound business strategy to tap international capital.

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Global concerns
Scandals in the USA, Russia, SE Asia collapse of the Russian economy privatisation leading to robbing of shareholders, creditors, govts, workers, etc.,moved out of the country distrust by foreigners Asian crisis lack of transparent control, of responsible corporate boards, of shareholder rights lead to collapse of investor confidence.
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Separation of ownership and management


Shareholders

Board

management

employees

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A simple model of CG focuses on; > Shareholders elect the directors who represent them > directors vote on key matters and adopt the majority decision > decisions are made in a transparent manner so that shareholders and others can hold directors accountable > co adopts accounting stds to generate information necessary for board, investors, and other stakeholders for decision-making > Cos policies And practices conform to national and local laws.
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McKinsey Model I market model


Governance chain efficient welldeveloped equity markets and dispersed ownership - applicable to developed nations, eg., USA, UK, Canada, Australia illustrates conditions and practices that are better understood and appreciated and as such highly valued by sophisticated global investors
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Institutional context
Shareholder environment

Corporate context
Independence and performance

Dispersed ownership

Non-executive Majority boards

Sophisticated Ownership institutional

Aligned incentives

Active equity markets

High disclosure

Active takeover market

Shareholder equality

Capital market liquidity


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Transparency and acountability


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McKinsey Model II Control model


Governance chain is represented by underdeveloped equity markets, concentrated family ownership, less shareholder transparency, inadequate protection of minority and foreign members Asia, Latin America, and some east European countries need to nurture supporting institutions, a strong capital market regulator and judiciary.
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Institutional context
Shareholder environment

Corporate context
Independence and performance

concentrated ownership Reliance on Family, bank, Public finance

insider boards

Incentives Aligned with core shareholders

Underdeveloped New issue markets

Limited disclosure

limited takeover market

Inadequate Minoriy protecton

Capital market liquidity 4/2/2014 m

Transparency and acountability


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Developed vs developing countries


> in the well developed Anglo-American, German, Japanese and other mature economies, proper checks and balances are in place to ensure good corporate behaviour- if aberration occurs quick remedial action is initiated eg., Sarbanes Oxley Act in the US by the Bush administration, as a result of corporate failure in 2002. > corp governance is a relationship among various participants in determining the direction and performance of a corporation goes beyond the simple concept of who is in charge and who has the power to improve shareholder value and support a continuing commitment to growth.
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3 basic assumptions; > primacy of the shareholder > diversity of the shareholder group > Primary aim of maximising shareholder wealth

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Corporate governance is about promoting fairness, transparency and accountability J. Wolfensohn, President of WB. The market model is a natural target for any reform process of developing or transition economies which will however require fundamental institutional reform McKinsey CG means doing everything better to improve relations between cos and their shareholders; to improve the quality of outside directors; to encourage people to think of long term relations; information needs of all stake holders are met and to ensure that executive management is monitored properly in the interest of shareholders.
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CG is holding the balance between economic and social goals and also 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 to 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, Chairman , Cadbury Committee on CG
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CG is the system by which business corporations are directed and controlled. The CG 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. OECD
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All the definitions are shareholder-centric and their concerns are > management accountability > providing adequate investments to managements > disciplining and replacement of bad management > enhancing corporate performance > transparency > shareholder activism > investor protection > improving access to capital markets > promoting long term investment > encouraging innovation.
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Modern view good governance required for industries and economies too.- - standards for developing economies to include well entrenched local customs, and regional traditions International business successive business failures and frauds in USA and several high profile failures in Russia and the Asian crisis Inefficiency of the earlier regime in Russia leading to its collapse- 1998 virtual collapse of the country for want of proper governance mechanism diversion of assets by managers realisation of the need to have proper governance mechanism to be globally 4/2/2014 51 competitive.

Developing and transition societies; - difficult to ensure proper CG in the absence of; > a well developed corporate culture > capital market > money market > regulatory systems > well defined public policies > Proactive govts > knowledgeable stake-holders > measures to counter; corruption, bribery, discrimination, culture of accepting misgovernance, fraud, misdemeanor as part of human frailties. 4/2/2014 52

Features; > entrenched family holdings > scattered, mute, uninformed, obliging and powerless shareholders > absence of and resistance to regulatory mechanisms, legal systems and institutions and norms. > political institutions influencing business practices.

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Corporate Governance is not just corporate management; it is something much broader to include a fair, efficient and transparent administration to meet certain well-defined objectives. It is a system of structuring, operating and controlling a company to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers and to comply with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practised under a well-laid out system, it leads to the building of a legal, commercial and institutional framework and to demarcate the boundaries within which these functions are performed.
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Growing concerns reflected in; - UK Cadbury Committee - France Vienot Commission - OECD (EU) new guidelines - USA Sarbanes-Oxley Act

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New definition; Some commentators take too narrow a view, and say CG is the fancy term for the way in which directors and auditors handle their responsibilities towards shareholders. Others use the term as though it is synonymous with shareholders democracy. Corporate governance is a topic recently conceived, as yet ill-defined, consequently blurred at the edges.CG as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers, and indeed for the reputation and standing of our nation and its economy.
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Beyond Board processes and procedures


CG is generally perceived as a set of guidelines to be followed by cos it is more; involves relationships between a cos management, its Board, its shareholders and other stakeholders, such as employees and community. Govt role legal, institutional and regulatory framework Quality of governance affects the efficiency of the economies eg., Russia, Asia increasing awareness among countries- improvements effected in systems, procedures and the frameworks.
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The OECD has emphasised the following requirements of corporate governance; > Rights of shareholders secure ownership of shares, voting rights, right to full disclosure of information, participation in decisions on sale or any change in corporate assets and new share issues, capital structures and arrangements that enable certain shareholders to obtain control disproportionate to their holding. > Equitable treatment of shareholders including minority and foreign shareholders
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- right to redressal of grievances - right to exercise voting right - change in voting rights to be approved by shareholders - insider trading and abusive self-dealing to be prohibited. - directors should disclose their material interests no conflict of interest - interested directors should not participate in deliberations on matters affecting their interests.
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> Role of stakeholders in corporate governance;


other stakeholders dealers, consumers, govt, banks, bondholders and workers representation in Boards, profit sharing, creditors involvement in insolvency proceedings- free access to relevant information. Disclosure and transparency; to all those entitled to receive such information Co objectives, financial information, operating results, governance structure, policies, directors and their remuneration, significant foreseeable risk factors, material issues re employees and shareholders annual external audit of high quality.
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> Responsibilities of the board; - protect the co, its shareholders and other stakeholders corporate strategy, risk, executive compensation, accounting and reporting systems, monitoring effectiveness and changing them, if needed establishment of rights and responsibilities of managers and directors. The above guidelines focus on separation of ownership and control of capital, disclosures, responsibilities of shareholders, managers and directors. Later commentators, add policies and procedures encompassing management disciplines, stakeholder participation in decisionmaking processes, social responsibility and corporations contribution to sustainable development.
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Evolution of CG from a narrow to a broader vision traditional focus on separation of ownership and control it is now accepted that firms should respond to the expectations of more stakeholders which include employees, consumers, large institutional investors, govt and the society-areas include corporate ethics, social responsibility , management discipline, corporate strategy, life cycle development, stakeholder participation in decision making and promotion of sustainable development quality of governance. controls-

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1985 USA Watergate scandal corporate donations, corruption during Nixon administration Foreign and Corrupt Practices Act 1977 SEC mandatory reporting on internal financial internal audit system. high profile failures -Treadway Commission Report in 1987 need for proper control environment, independent audit committees, objective internal audit. The Commission recommended setting up of The Committee of Sponsoring Organisations (COSO) which submitted its report in 1992- stipulate a control framework for the orderly functioning of corporations.
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UK scams in the 80s and 90s famous cos such as Polly Peck, Bank of Credit and Commerce international (BCCI)Robert Maxwells Mirror Group International fell due to poor management and lack of proper control. The Cadbury Committee appointed by the London Stock Exchange in 1991 to draft a code of practicesto assist cororations in Engaland in defining and applying internal controls to limit their exposure to financial loss.

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Objective; to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them. The Committee investigated extensively the accountability of the board to shareholders and to society Report along with a Code of Best Practices 1992 elaborated methods of governance to achieve a balance between the essential powers of the Board and their proper accountability listed cos had to state in their accounts whether they had followed the Code.
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Adopted world wide controversial recommendation- directors should report on the effectiveness of a cos system of internal control. going beyond financial control. Greenbury Report of 1995 directors remuneration Further scandals by 1996-97. Committee on CG - Hampel Report in 1998 extended directors responsibilities to all relevant control objectives including business risk assessment and minimising the risk of fraud. The combined code of all rhese reports appended to the listing Rules of the LSE.
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The Combined Code stipulated, inter alia, - boards should maintain a sound system of internal control to safeguard shareholders investments and the cos assets. - review the effectiveness of the groups system of internal control and should report and report to shareholders at least once a yr that they have done so. review to cover all controls, including financial, operational and compliance and risk management. Turnbull guidance in 1999 required that the Board should confirm that there was an ongoing process for identifying, evaluating and managing key business risks risk management process was in place now being passed on to the internal audit dept.
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> Banking sector; Bank failures around this time necessitated closer look at this sector need to improve and strengthen the system felt Lyon G-7 Summit in 1996 called for action Basel Committee of Banking Supervision established by the Central Bank Governors of the Group of 10 countries in 1975, Bank for International Settlements, IMF and WB been examining the issues and setting up norms for the banking sector.
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Revival of Corporate governance Issues after 2000


Demise of Enron, WorldCom, Adelphia, Global Crossing, Dynergy, Sunbeam, and Tyco. revela tions of corruption, fraud, deception, insider trading and self dealing sample of murky dealings by corporations, severely damaging investor interests and confidence declining stock prices investigations by the Congress, and State Attorney General, SEC the Sarbanes Oxley Act of 2002.
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Summary; Environment
Loss of moral fibre of corporations Business environment characterized by need to compete with the new economy

Boards
Fundamental weaknesses in business models sought to be compensated by adoption of aggressive accounting practices Ignored ethics and value systems when a much hyped business strategy failed to deliver as expected and articulated to Wall Street Incompetence of board members and overriding of audit committees

Managements
Stock option heavy compensation structures Bonus linked to short-term revenue growth, EPS and stock price An inability to accept failure Excessive focus on beating the street

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Auditors Aggressive interpretation of accounting standards Independence compromised to obtain lucrative consulting assignments Employees Compensation linked to stock-price movement Large disparity between the highest and lowest paid employee Culture of greed promoted within the organization by management Manipulative accounting practices Analysts Ever-greening of reports with an eye on investment banking assignments Pressurized managements to beat quarterly estimates Investors Short term focus of investors 4/2/2014 71

Different meanings to different people a means to an end long term shareholder and stakeholder value crucial issues; > distinguishing the roles of Board and management delegated to the CEO Board is the link between the management and the shareholders; its functions are; - select, decide the remuneration of the CEO and evaluate and change the CEO, if necessary. - oversee indirectly the conduct of the cos business - review and where necessary approve the cos financial objectives and the cos major corporate plans and objectives - render advice to top management
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Issues in Corporate Governance

- identify and recommend potential directors to be elected by shareholders - review of the legal compliance system - other functions required by law > Composition of the board and related issues; A board is a committee elected by the shareholders of a limited co to be responsible for the policy of the company. Sometimes, full time functional directors are appointed, each being responsible for some particular branch of the firms work. Composition no of directors of different categories change over a period of time executive, nonexecutive, independent and affiliated or nominee directors.
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SEBI appointed KM Birla Committee defined the composition of a Board as; The Board of directors of a company shall have an optimum combination of executive and non executive directors with not less than 50% to be non executive. Number of executive directors will depend on whether the chairman is executive or non executive. In case of a non executive chairman, at least one-third of the directors should be independent and in case of an executive chairman, at least half of the directors should be independent.
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An executive director is one who is an executive of the co and also a director while a non executive director is one who is not an employee of the co. Independent non-executive director is one who dopes not have any relationship with the co which might materially interfere with the exercise of independent judgment in the process of decision making as a member of the board. An affiliated or nominee director is a non executive director who has some kind of independence, impairing relationship with the company ort the cos management, e.g., may be a partner in a professional firm that supplies services to the co, or may be a retired top management professional of the co.
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> Separation of the roles of the CEO and the chairperson composition of the Board is a major issue in governance as the board acts as the link between the shareholders and the management and its decisions affect the performance of the co. Professionalisation of management in family concerns starts with the composition of the board. All committees have recommended improvements in the composition. Combination of the functions of the chairperson with that of the CEO, as in USA and India leads to conflicts in decision making and too much concentration of power in one person In the UK and Australia, the CEO is prohibited from being the chair person of the co. the role of the CEO is to lead the senior management team in managing the enterprise, while the role of the chairperson is to lead the board, one important responsibility of the board is to evaluate the performance of the CEO and the senior executives. Combining the functions of both removes an important check on senior executives activities in many firms, the job of the CEO and that of the Chairman may be to heavy to be shouldered by the same person.
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> Should the board have committees? Most of the committees on corporate governance have recommended independent committees for i. Nomination, ii. Remuneration, iii. Auditing, etc. The Bosch Report apart from having written terms of reference outlining their authority and duties, should also have clear procedures for reporting back to the Board, and agreed arrangements for staffing including access to relevant co executives and the ability to obtain external advice at the cos expense. if these committees are peopled with independent directors selected for their competence, professional expertise and experience would help the committees decide issues objectively to promote the long term interests of the organisation.
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> appointments to the board and directors reelection; - shareholders endorse the boards nominee. > Directors and executives remuneration vexed issue prominent in 2000 2002, when there were massive corporate failures in the USA politically sensitive issue Cadbury report; The overriding principle of Board remuneration is that shareholders are entitled to a full and clear statement of Directors present and future benefits, and how they have been determined. Other committees have also emphasised the principle of pay for performance, other committees also have commented on heavy severance payments, pension for non executive directors, appointment of remuneration committee, etc.,
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However, controversy often surrounds the size or quantum of remuneration, this is not necessarily an issue of corporate governance- a payment that may be excessive in one context may be reasonable in another. The key corporate governance issues are i. transparency, ii. pay for performance, iii. Severance payments, and, iv. Pension for non executive directors.
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> Disclosure and audit; The OECD laid down several provisions for the disclosure and communication of key facts about the co to its shareholders. Audit also provides a basis for reassurance for everyone who has a financial stake in the co. The Cadbury Report and the Bosch Report stressed that the Board has a duty to present to the shareholders a lucid and balanced assessment of the cos financial position through audited financial statements. Auditing issues affecting corporate governance include; > Should boards appoint an audit committee? > If yes, what should be the composition? > How to ensure its independence? > provisions regarding non audit services rendered by auditors. > Should individual directors have access to independent resources? > should Boards formalise performance stds?
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> Protection of shareholders rights and their expectations varied practices and policies the usual issues are; - should cos adhere to one-share-onevote principle? - should voting be by show of hands or poll? - Can shareholders resolutions be bundled? - should shareholder approval be obtained for every major transaction?, etc.

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> Dialogue with institutional shareholders - responsibility for regular interactions. > Should investors have a say in making a co socially responsible corporate citizen? different schools of thought environmental factors, ecologycitizens. Etc.
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Benefits to society
> prevent systemic crises in financial markets, esp., banking. > more liquid capital markets > competition in product markets and for capital act as constraints on corporate governance. > limits the role of corruption. > Improve management of the firm and help work out business strategy modern management practices to be adopted.
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Benefits to the corporation


> enhances the corporations competitive advantage creating and delivering value > eliminates fraud and malpractices > protection of shareholders interests > enhance the valuation of enterprise > ensuring compliance of laws and regulations.
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