PRESENTATION ON UNIT 5

By:

Jerin k Abraham

CORPORATE GOVERNANCE
Corporate governance is "the system by which companies are directed and controlled. 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

PRINCIPLES OF CORPORATE GOVERNANCE

Rights and equitable treatment of shareholders Interests of other stakeholders

Role and responsibilities of the board

Integrity and ethical behavior Disclosure and transparency

INTERNATIONAL CORPORATE GOVERNANCE

GERMANY
Owner and manager are often the same in private firms

Public firms often have a dominant shareholder too, frequently a bank

Employees, union members and shareholders appoint members to the supervisory board. Excutive board monitors and controls managerial decisions .Supervisory board selects the excutive board .

INTERNATIONAL CORPORATE GOVERNANCE

JAPAN

Banks are highly influential with firms managers

Powerful government intervention Close relationships between firms and government sector

Passive and stable shareholders who exert little control

CORPORATE BOARD OF DIRECTORS

Responsibilities
&

liabilities

Board of Directors

Board of directors is a body of elected or appointed

members who oversee the activities of a company or organization.

Board of governors, board of managers, board of

regents, board of trustees, and board of visitors or simply called as the board
organization's bylaws

RESPONSIBILITIES
The board of directors has dual responsibilities

Advisory
Consult with management regarding strategic and

operational direction of the company. Oversight Monitor company performance and reduce agency costs.

The responsibilities of the board are separate and

distinct from those management.

Continue

To approve corporate strategy

Test business model and identify key performance

measures Identify risk areas and oversee risk management Design executive compensation packages Protect company asset and reputation Represent the interest of shareholders

Continue.
The legal responsibilities of boards and board

members vary with the nature of the organization, and with the jurisdiction within which it operates. For public corporations, these responsibilities are typically much more rigorous and complex than for those of other types. Typically the board chooses one of its members to be the chairman, who holds whatever title is specified in the bylaws.

Continue.
The role and responsibilities of a board of

directors vary depending on the nature and type of business entity and the laws applying to the entity . For example, the nature of the business entity may be one that is traded on a public market (public company), not traded on a public market (a private, limited or closely held company), owned by family members (a family business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity).

Liabilities
General principles can make directors personally

liable if they have intentionally or negligently caused harm to third parties. Examples of where directors can be held personally liable for damages include: 1. Fraudulently inducing the association to breach a contract; 2. Improper or unjust dismissal of employees; Some times directors act in bad faith or outside the scope of their authority, will they have a problem. For example, an employee may be fired without just cause, but the dismissal may be in the best interests of the association.

LIABILITY AVOIDANCE
There are three ways directors can reduce the

risk of liability due diligence disclosure of personal interests self defense.

Corporate Disclosure and Investor Protection

To make investing as fair as possible for everyone, companies must disclose both good and bad information. In the past, selective disclosure was a serious problem for investors because insiders would frequently take advantage of information for their own gain - at the expense of the general investing public.

The Legal Approach to Corporate Governance

The law and its enforcement are key mechanisms of investor

protection. When investors finance firms, they receive rights or powers in exchange. Without an ability to enforce rights, investors might end up with nothing.
Company law Bankruptcy law Securities law Takeover law Courts & Regulators Protect Shareholders & Creditors Force timely disclosure of accurate information

Implication: Strong investor protection leads to deeper

financial markets & better financing terms for firms.

16

Challenges Ahead
But more importantly, the evidence raised here

suggests that there are 3 essential ingredients for the system to work in the long run:
1. Better investor rights in corporate laws, strong regulation on disclosure and accounting standards. 2. Regulations and laws that facilitate shareholder actions and private enforcement. 3. A well functioning judicial system which allows the functioning of financial markets and business transactions in general.

The Rigas of Adelphia

Over $2.5 Billion co-borrowed by family

entities. $1.4 B used to buy shares in Adelphia. $200 M to fund margin call payments on loans secured by Adelphia securities.
Guaranteed $120 M to Rigas entity controlling

Buffalo Sabers hockey team.

$3.5 M in unsecured loans made to Rigas

family. $12 M to build golf course next to Rigas estate

Use of Adelphia-owned aircraft and

apartments without charge for personal purposes.

18

Corporate Mis-Governance

Recent Misconducts: The List Goes On

Computer Associates:
Artificially inflated revenue and improperly rewarded top

executives.

CMS Energy
Overstated revenues in 2000 and 2001 thru round trip energy

trades

Dynegy
Transactions to cut taxes and artificially increase cash flow

Kmart
Suspected improper accounting for vendor allowances

Lucent Technologies
Adjusted fiscal 2000 revenues by $679 million.

Several more names, respected world-over

AOL Time Warner, Bristol-Myers, Elan,Halliburton, ImClone Systems,

Micro strategy, Mirant, Network Associates, Reliant Resources, Vivendi Universal, Xcel Energy, Xerox.

The Role of Committees of the Board of Directors

Ability to create committees long recognized and, viewed as an inherent power of the Board of Directors, it is not the subject of detailed statutory provisions The traditional view that the Boards activities were not subject to delegation to committees long ago gave way to the view that most decisions are subject to delegation to Board committees

The Role of Committees of the Board of Directors

The rationale for the creating of Board committees, particularly in the context of the large modern corporation
Efficiency of Boards operations Need to develop subject specific expertise in the

Boards operations and the desire to access particular expertise of Board members Particularly enhancing the objectivity and independence of the Boards judgment, insulating it from the potential undue influence of managers and controlling shareholders

Board Committees
Standing committees
Executive Committee Audit Committee

Compensation Committee
Nominating Committee Public Policy Committee/Governance and Ethics Committee

Audit Committee Responsibilities

Audit committee oversight responsibilities can be grouped into the following categories:
-Corporate governance - Internal controls - Financial reporting - Audit activities - Code of ethics conduct - Whistleblower program - Enterprise risk management - Financial statement fraud

Compensation Committee
The compensation committee is usually formed to determine the compensation and benefits of directors and executives. Structure: The committee should be composed of all independent directors who rotate periodically.

Committee responsibilities:
1. Evaluation of directors. 2. Design and implementation of director compensation plans.

3. Evaluation of senior executives.

4. Design and implementation of executive compel plans.

Nominating Committee
The nominating committee is usually responsible for evaluating and nominating a new director to the board, and it also facilitates the election of the new director by shareholders. The nominating committee is responsible for (1) reviewing the performance of current directors; (2) assessing the need for new directors; (3) identifying and evaluating the skills, background, diversity, and knowledge of candidates; (4) having candidates; an objective nominating process for qualified

(5) assisting in the election of qualified new directors.

Board Committees
Ad hoc or special committees
Special Litigation Committee Ad hoc committees formed to :(I) to consider takeover or buyout offer, (ii) to investigate and advise on the appropriate response to allegations of serious misconduct against the corporation or its senior officers, and (iii) to evaluate and negotiate corporate re-structuring or refinancing or other matters where conflicts of interest might otherwise arise

Board Committees
Ad hoc or special committees
Special Litigation Committee Ad hoc committees formed to :(I) to consider takeover or buyout offer, (ii) to investigate and advise on the appropriate response to allegations of serious misconduct against the corporation or its senior officers, and (iii) to evaluate and negotiate corporate re-structuring or refinancing or other matters where conflicts of interest might otherwise arise

GLOBALIZATION
Integration of national economies with the

international economies.
It is done through trade ,foreign direct investments,

migration, capital flows and spread of technology.

It also refers of transnational dissemination of

ideas, languages or popular culture.

CORPORATE GOVERNANCE
Corporate governance involves a network of relationships

between corporate managers, directors, stakeholders and society.

Is concerned with holding the balance between economic

and social goals and b/n individual and communal goals.

Its primary purpose of it is to create wealth legally and

ethically.
It bring high level satisfaction to customers,

employees,investors,vendors and the society at large.

GLOBALIZATION & CORPORATE GOVERNANCE

Corporate Reporting using international standards. Widespread agreements on core principles of independence,

fairness ,transparency and accountability Corporate Governance codes-best practice governance standards. OECD principles ICGN(International Corporate Governance Network) In the case of MNC s : The structure of CG is in Parent-subsidiary structure. Governance structures are shaped by both host and home countries.