Corporate Governance

Concept
 System of internal controls and procedures by which
individual companies are managed
 Provides a framework that defines rights, roles and
responsibilities of different groups- Board,
management, shareholders
 Is the arrangement of checks, balances, incentives a
company needs, in order to minimize and manage
the conflicting interest between inside and outside
shareholders
 Purpose: to prevent one group from expropriating the
cash flows and assets of one or more other groups
CG seeks to ensure
(objectives):
 Board members act in the best interests of shareholders
 Co. acts in lawful and ethical manner
 All shareholders have same right to participate in governance of
the co. and receive fair treatment, rights are clearly delineated
and communicated
 Board and committees are structured to act independently
 Appropriate controls and procedures are in place to run day to
day operations of the co.
 Reporting of co.’s operating, financial and governance activities
to shareholders in a fair, accurate, timely, reliable, relevant,
complete and verifiable manner
CG Considerations
 For the Board
 For the Management
 For the Shareowners’ Rights
The Board
Investors and shareowners should determine
whether the Board:
 Has a majority of independent members
 Members have requisite qualifications
 Has budgetary authority to hire independent third
party consultants
 Members are elected annually or election process
staggers the terms
 Company engages in outside business relationships
with management or Board
 Has established independent audit committees to
oversee the audit process
 Has an independent committee to set and
supervise executive remuneration/
compensation
 Has an independent nominations committee
to recruit board members
 Has other committees for overseeing
management’s activities in select areas, such
as CG, M&As, legal matters, risk
management….
Management
 Investors and shareowners should determine whether:
 Co. has adopted a code of ethics and actions indicate conformity
to those
 Co. permits board members and management to use co. assets
for personal reasons
 Analyze amounts paid and manner of payment, to key
executives, to see that compensation structure is commensurate
with their responsibilities and performance
 Inquire into the size, purpose, means of financing and duration
of share repurchase programs and price stabilization efforts
Shareowner Rights
Investors and shareowners should determine
whether:
 Co. permits SHs to vote by proxy
 SHs are able to cast confidential votes
 Permits cumulative voting for electing board
members
 SHs can approve changes to corporate structures and
policies
 SHs can nominate individuals for election to the
Board
 SHs can submit/ initiate proposals for consideration
at the Co.’s AGM
 Board and mgt. are required to implement
proposals that SHs approve
 Ownership structure has different classes of
shares: DVS (differential voting shares)
 CG code and local law permits SHs to take
legal action to protect their rights
 Structure of takeover defenses is fair and
appropriate
CG in India
 CG normally arises to avoid agency costs: due to
separation of ownership and management
 However, in India, ownership structure is dominated
by promoters and FIs: entrenched system in pvt
sector, PSUs dominated by politicians and
bureaucrats
 Most companies are promoter driven, hence CG issue
is to avoid costs due to conflict of interest between
inside (management/ promoters owned) and outside
(external/ non promoters owned) SHs
 Tunneling: dominant SH may tunnel into the firm and
benefit at the expense of minority SHs
 Sarbanes Oxley Act of 2002
 FIs play a crucial role in ensuring CG in India
 Legal provisions and SEBI Code: defines roles,
structure, remuneration of the Board
 Clause 49 of the Listing Agreement covers provisions
relating to:
 Board of Directors
 Audit Committee
 Disclosures in annual reports
 CEO/ CFO certification
 ICRA rates companies on the quality of CG (CGR1 to
6)