Corporate Governance

Module 6

Accountability issues in corporate

governance
Distinguishing

the roles of board and

management1. Select , decide the remuneration and

evaluation
2. Oversee the conduct of companys
business
3. Review and approve the companys
financial objectives
4. Render advice and council to top
management
5. Review the adequacy of systems

Contd..
Composition

of the board and

related issues1. BOD is a committee elected
by the shareholders of a limited
company to be responsible for
the policy of the company

Contd..
Separation

of the roles of the

CEO and chairperson1. CG is a link between
shareholders and the
management and its decision
affect the performance of the
company.
2. CEO-lead the senior
management team
3. Chairperson - lead the board

Contd..
Should

the board have

committees1. Many committees to recomment
for special committees for2. Nomination
3. Remuneration
4. Auditing

Contd
Appointment

to the board and directors and re-election Directors and executive remuneration1. Transparency
2. Pay for performance
3. Process for determination
4. Severance for non-executive directors
. Disclosure and audit
. Protection of shareholders rights and their expectations1. should companys always adhere to one share one vote principle
2. Should companys retain voting by a show of hands or by poll
3. Should share holders approval be required for all major
transactions
. Dialogue with institutional shareholder issue
. Should investors have a say in making a company socially
responsible corporate citizen

Theoretical aspects of corporate

governance
Agency

theory Fundamental theory

Shareholders are the owners of any joint stock
limited liability company
Mgmt selected by shareholders
Shareholders and other stakeholders of the
company are not able to counteract
Inadequate disclosure
Principals may be too scattered
Mismatch of objectives is called agency problem
In agency theory terms, the owners are principals
and the managers are agents and there is an
agency loss.

Contd..
Problems

with agency theory1. Total control of management is

neither feasible nor required.
2. The basic objective of agency theory
is to check the abuse in the tradeoff , which is questioned.
. Mechanism to reduce agency cost
1. Fair and accurate financial disclosure
2. Efficient and independent board of
directors

Contd..
Stewardship
1.

2.

3.
4.

theory
This theory discounts the possible conflicts
between corporate management and owners and
shows a preference for a board of directors made
up of primarily of corporate insiders
This theory assumes that managers are basically
trust worthy and attach significant value to their
own personal reputation
Financial reporting , disclosure and auditing are
important mechanism
This theory defines situations in which managers
are not motivated by individual goals but rather
they are stewards whose motives are aligned with
the objectives of their principals

Contd..
Stakeholders

theory1. Theory considers the firm as an input

output model by explicitly adding all
interest groups employees, customers ,
dealers , govt and the society at large-to
the corporate mix
. Sociological theory1. Focus on board composition and the
implications for power and wealth
distribution in society.
2. Financial reporting , auditing necessary to
promote fairness