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THE THEORY
AND PRACTICE
OF CORPORATE
GOVERNANCE
OBJECTIVES
Over the past three decades, the concept of
corporate governance has gone through a
metamorphosis. Theoretically, from one that
was related to agency cost, it is now
perceived to encompass everyones interests.
This chapter discusses the theoretical basis,
mechanisms and the divergent models of
corporate governance and culminates in the
identification of an ideal corporation.
CHAPTER OUTLINE
What is a Corporate?
The term corporate refers to an association of
many persons, who contribute money or
moneys worth to a common stock and employ it
in some trade or business, and who share the
profit and loss arising therefrom. The common
stocks so contributed is denoted in money and is
the capital of the company. The persons who
contribute it, or to whom it belongs, are its
members. The proportion of the capital to which
each member is entitled is his share. Shares are
always transferable, although the right to
transfer them is often more or less restricted.
What is Governance?
Governance is the process of decision
making and the process by which decisions
are implemented or not implemented.
Characteristics of a Corporation
o
Incorporated Association
Perpetual Existence
Common Seal
Extensive Membership
Limited Liability
Transferability of shares
Agency Theory
Stewardship Theory
Stakeholder Theory
Sociological Theory
Behavioural Differences
THEORY
AGENCY
STEWARDSHIP
Managers act as
Agents
Stewards
Governance Approach
Materialistic
Sociological and
Psychological
Behaviour Pattern
o Individualistic
o Opportunistic
o Self-serving
o
o
o
Managers motivated by
Their own
objectives
Principals objectives
Collectivistic
Pro-organisational
Trustworthy
Converge
Management Structures
Monitor and
control
Owners Attitude
Risk Avoidance
Risk taken
Principal Manager
Relationship based on
Control
Trust
Psychological Mechanisms
PSYCHOLOGICAL
RESPONSES
Motivation
AGENCY THEORY
STEWARDSHP
THEORY
o Lower order
o Higher order
needs
o Extrinsic needs
needs
o Intrinsic needs
Principal
Attachment
Little attachment
to company
Great attachment to
company
Power
Institutional
Personal
Situational Mechanisms
SITUATIONAL
RESPONSES
AGENCY THEORY
STEWAREDSHIP
THEORY
Management
Philosophy
Control oriented
Involvement
oriented
Greater controls
More supervisions
Training and
empowering people
Risk orientation
Through a system
of control
Through trust
Time frame
Objective
Cost control
Improving
performance
Making jobs to be
more challenging
and motivating
Collectivism
Small power
Governance
Shareholders
Elect
Appoints &
Supervises
Creditors
Own
Stakeholders
Board of Directors
(Supervisors)
Lien
on
Stake
in
Officers
(Managers)
Manag
e
Company
Shareholde
rs
Appoint
50%
Appoint
50%
Supervisory Board
Appoints and
Supervises
Management Board
(Including Labour
Relations Officer)
Manage
Employee
s and
Labour
Unions
Company
Shareholde
rs
Provides
Loans
Supervisory Board
(Including President)
Ratifies the
Presidents
Decisions
President
Provides
Managers
Monitors & Acts
in
Emergencies
Consults
Executive Management
(Primarily Board of
Directors)
Manages
Main
Bank
Own
Owns
Provides Loans
Company
Company Acts
SEBI
Stock Exchanges
Depositors, Borrowers,
Internal Environment
Auditors
Board of
CORPORATE
GOVERNANCE
SYSTEM
Proper governance
Shareholder value
Corporate Governance Outcomes / Benefits to Society
Transparency
Investor protection
Concern for customer
Healthy corporate sector development
Environment-friendliness
Competition
Trusteeship
Accountability
Timely Responsiveness
Obligation to investors
o Towards Shareholders
o Measures Promoting Transparency and Informed
Shareholder Participation
o Transparency
o Financial Reporting and Records
Obligation to customers
o Quality of Products and Services
o Products at Affordable Prices
o Unwavering Commitment to
o Customer Satisfaction
Obligation to employees
o Fair Employment Practices
o Equal-opportunities Employer
o Encouraging Whistle Blowing
o Humane Treatment
Participation
Empowerment
Managerial obligation
o Protecting Companys Assets
o Behaviour Towards Government Agencies
o Control
o Consensus Oriented
o Gifts and Donations
o Role and Responsibilities of Corporate Board and
Directors
o Direction and Management must be Distinguished
o Managing and Whole-Time Directors
Corporate Governance in
India
Problems
o Inadequate Sanction and Enforcement.
o No clear demarcation of control mechanisms
Accounting gimmicks
Obliging auditors
Media influences