Corporate Governance

• Corporate governance is, therefore, the process whereby

people in power direct, monitor and lead corporations,
and thereby either create, modify or destroy the structures
and systems under which they operate.
• Corporate governors are both potential agents for change
and also guardians of existing ways of working.
• Corporate governance is the combination of
rules, processes or laws by which businesses
are operated, regulated or controlled.
 Corporate Governance-Meaning
• It is the system by which corporate enterprises
are directed and controlled. “The corporate
governance structure specifies the distribution
of rights and responsibilities among different
participants in the corporation, such as board,
managers, shareholders and other stakeholders,
and spells out the rules and procedures for
making decisions on corporate affairs.” It, thus,
provides the structure of corporate enterprises
 Historical Development of Corporate
Governance
• In the 1970s, things began to change as the
Securities and Exchange Commission (SEC)
brought the issue of corporate governance to
the forefront when they brought a stance on
official corporate governance reforms. In
1976, the term “corporate governance” first
appeared in the Federal Register, the official
journal of the federal government.
 Historical Development of Corporate
Governance
• In the 1960s, the Penn Central Railway had diversified by starting
pipelines, hotels, industrial parks and commercial real estate. Penn Central
filed for bankruptcy in 1970 and the board came under public fire. In 1974,
the SEC brought proceedings against three outside directors for
misrepresenting the company’s financial condition and a wide range of
misconduct by Penn Central executives.
• Around the same time, the SEC caught on to widespread payments by
corporations to foreign officials over falsifying corporate records. During
this era, corporations started to form audit committees and appoint more
outside directors. In 1976, the SEC prompted the New York Stock
Exchange (NYSE) to require each listed corporation to have an audit
committee composed of all independent board directors, and they
complied.
Corporate Governance Objectives/Role:
1. To align corporate goals with the goals of its stakeholders
(society, shareholders etc.).
2. To strengthen corporate functioning and discourage
mismanagement.
3. To achieve corporate goals by making investment in
profitable outlets.
4. To specify responsibility of the Board of Directors and
managers in order to ensure good corporate performance.
5. Integrity and Ethical Behaviour on both fronts.
Corporate Governance Importance/Principle:

• 1. Creating Competitive Advantage and equitable

treatment:
It refers to building a core competency that works as an
edge over the rivals of a particular organization.
Competitive advantage comes into being only when the
organization supports value creation. An example of
value creation would be Sony, which has the
competitive advantage of creating small-sized products
(a smaller version of all products) that are more
effective and of better quality.
Corporate Governance Importance/Principle:

• 2. Preventing Fraud and Malpractices:

It refers to precluding misconducts and fraudulent practices so as
to ensure sound and trustworthy corporate environment. Small
frauds can lead to big financial crisis; therefore, such frauds
should be prevented at the nascent stage only.
• 3. Bringing in Transparency:
It refers to meeting investor’s expectations by creating an open
system that aims at providing accountability and transparency in
all organizational operations. This further leads to value
enhancement and provides for effective implementation of
corporate standards.
Corporate Governance Importance/Principle:

• 4. Legal Compliance:
It refers to adhering to the laws and regulations as per the legal
machinery of a country. Compliance to laws enables an organization
to survive in the long term and builds a good code of conduct.
Jurisdiction also helps in protecting the rights of investors; thereby,
simplifying one of the many objectives of corporate governance
• 5. Ethical Operations:
Organisations should develop code of conduct for their directors and
executives that promote ethical and responsible D-M. To ensure
such ethical decisions, organisations should establish compliance
and ethics programmes to minimise the risk of failure and staying in
legal boundaries.
Corporate Governance Case Study:
• ICICI Bank’s troubles are rooted in a 2016 complaint by an
investor alleging a quid pro quo deal between Bank CEO’s
immediate family members and the Videocon group which got
a Rs. 3,250-crore loan from it. When this ‘conflict of interest’
complaint resurfaced in the public domain this year, chairman
of board of directors of the bank personally inquired into it
two years earlier and found nothing amiss.
• With the Central Bureau of Investigation and later the stock
market regulator SEBI swooping in, the issue of whether the
bank had failed to make adequate disclosures about its
dealings with the borrower (who is now a defaulter) and a firm
related to CEO’s family member was spotlighted.
Corporate Governance Case Study:
• To address the allegations the bank has formed a Committee to
probe into the issue, the internal review undertaken by the
bank confirmed that there was no material finding of lapse.
• The concern here is that the review was done internally by the
bank and the report was never made public, let alone the
conflict-of-interest being disclosed to SEBI.
• Over this issue SEBI has summed ICICI Bank and CEO for
not reporting the conflict of interest, For over two months no
explanation has been submitted to SEBI.
• There are also rumours that ICICI bank and CEO may file for
settlement proceedings with SEBI for the compounding of
offences.
Corporate Governance Case Study:
• What measures needs to be taken?
• When investors and flat owners lost their hard-earned money to bad
builders, Bombay High Court directed the police department to treat
such cases as criminal and register the complaints against the
builders in question. The same principle should be applied when
equity investors lose money due to bad corporate governance.
• To this end, like the Real Estate (Regulation and Development) Act
(RERA), 2016, a separate act and regulations are required to protect
equity capital investors in the stock market.Thus the policy must
address the issues like Nepotism, favouritism, conflict-of-interest,
quid pro quo, transparency, Lack of accountability.
 Corporate Governance in India:
• In India, corporate governance initiatives have been
undertaken by the Ministry of Corporate Affairs
(MCA) and the Securities and Exchange Board of
India (SEBI).
• The first formal regulatory framework for listed
companies specifically for corporate governance was
established by the SEBI in February 2000, following
the recommendations of Kumarmangalam Birla
Committee Report. It was enshrined as Clause 49 of
the Listing Agreement.
 Corporate Governance in India:
• Further, SEBI is maintaining the standards of corporate governance
through other laws like the Securities Contracts (Regulation) Act,
1956; Securities and Exchange Board of India Act, 1992; and
Depositories Act, 1996.
• The Ministry of Corporate Affairs had appointed a Naresh Chandra
Committee on Corporate Audit and Governance in 2002 in order to
examine various corporate governance issues. It made
recommendations in two key aspects of corporate governance:
financial and non-financial disclosures: an independent auditing and
board oversight of management.
• It is making all efforts to bring transparency to the structure of
corporate governance through the enactment of Companies Act and
its amendments.
 Corporate Governance in India:
• With the goal of promoting better corporate governance
practices in India, the Ministry of Corporate Affairs,
Government of India, has set up National Foundation for
Corporate Governance (NFCG) in partnership
with Confederation of Indian Industry (CII), Institute of
Company Secretaries of India (ICSI) and Institute of Chartered
Accountants of India (ICAI).
 Issues of Corporate Governance in India:
• Stressed balance sheets - The bad debt problem (NPAs),
which has affected the corporate sector, is as much an outcome
of bad corporate governance as it is due to the vagaries of the
business cycle. Many expensive acquisitions were made in the
last decade by companies without a proper approval from the
shareholders. As a result, few of them paid off for the
shareholders.
 Issues of Corporate Governance in India:
• The composition of the Board - The Companies Act, 2013
introduced several good corporate governance provisions such
as, one-third of the company board should comprise of
Independent Directors, the board should have at least one
woman Director, the constitution of Audit Committee within
the board etc. However, several companies still haven't
appointed woman directors in their boards while some of them
have named the women family members or friends of
promoters as directors.
 Issues of Corporate Governance in India:
• Role of Independent Directors - Independent Directors were
supposed to enhance the accountability of the board to the
shareholders. As part of the Audit Committees, they were to
ensure that the financial disclosure process was carried out as
per the law. However, it was observed that they had failed to
make their mark on company boards. Many of them fail to
stand up to promoters' decisions if they find it to be against the
interest of all the stakeholders. The main reason for their
weakness is their removal process - they can be easily
removed by the promoters or majority shareholders, affecting
their independence.
 Issues of Corporate Governance in India:
• Role of Independent Directors - Independent Directors were
supposed to enhance the accountability of the board to the
shareholders. As part of the Audit Committees, they were to
ensure that the financial disclosure process was carried out as
per the law. However, it was observed that they had failed to
make their mark on company boards. Many of them fail to
stand up to promoters' decisions if they find it to be against the
interest of all the stakeholders. The main reason for their
weakness is their removal process - they can be easily
removed by the promoters or majority shareholders, affecting
their independence.
 Issues of Corporate Governance in India:
• The conflict between promoters and management - since many
companies are family owned enterprises, the promoters as majority
shareholders continue to exercise disproportionate influence over
business decisions. This sometimes leads to a conflict between the
promoters and the management, which is responsible for the day-to-
day functioning of the company. Recent instances of ousting of Tata
group chairman by Tata Sons, and the forced exit of the CEO of
Infosys, both due to differences between the top management and
the promoters, have highlighted the weaknesses in our corporate
governance norms. This conflict has also reflected the weaknesses in
succession planning by the founders/promoters, many of them
inherent inhibitions to let go of control over their companies.
 Issues of Corporate Governance in India:
• Executive Compensation - According to the new Companies
Act, the nomination and remuneration committee of the Board
(comprising a majority of independent directors) is to decide
on the compensation to key employees. This needs to be
approved by the shareholders. However, the top employees are
paid exorbitant remuneration in certain instances where they
allow a significant say to the promoters as quid pro quo. On
the other hand, many small companies fail to offer competitive
remuneration to attract talented professionals. Sometimes,
exorbitant remuneration to the top employees can become an
issue of conflict between promoters and management, like the
case of Infosys.
Agency Theory of Corporate Governance:
• Agency theory examines the relationship between the agents
and principals in the business. In an agency relationship, two
parties exist – the agent and principal, whereby the former acts
and takes decisions on behalf of the latter.
• The theory revolves around the relationship between the two
and the issues that may surface due to their different risk
perspectives and business goals.
• In finance, the most talked about agency relationship exists
between shareholders and executives of a corporation where
the top brass is elected to act in the interest of the true owners
of the company.
Agency Theory of Corporate Governance:
• It relates to a specific type of agency relationship that exists
between the shareholders and directors/management of a
company. The shareholders, true owners of the corporation, as
principals, elect the executives to act and take decisions on
their behalf.
• The aim is to represent the views of the owners and conduct
operations in their interest.
• Despite this clear rationale of electing the board of directors,
there are a lot of instances when complicated issues come up
and the executives, knowingly or unknowingly, take decisions
that do not reflect shareholders’ best interest.
 Importance of Agency Theory:
• Different Risk Appetite
Shareholders are mostly not involved in the day-to-day
working of the company and hence are not fully
equipped to understand the rationale behind critical
business decisions. On the contrary, managers are more
far-sighted and have a far greater risk appetite due to
their close access to the relevant information.
 Importance of Agency Theory:
• They believe in the going concern concept
of accounting and most of their decisions are taken
keeping the long-term view of the company in mind.
While the shareholders are keen to increase the
current and future value of their holdings, the
executives are more interested in the long-term
growth of the company. Thus, the differences in their
approach create a feeling of distrust and disharmony.
 Importance of Agency Theory:
• Super Self Centered Executives
The situation could be exactly opposite also when the
managers have interest in showing short-term
performance to the owners to get their pay hikes. This is
more prevalent and a more dangerous situation.
 Conclusion of Agency Theory:
• With markets getting volatile as ever, it becomes imperative
that both, the interests of the shareholders and the company
are taken care of.
• The shareholders should trust the management of the company
and go an extra mile to understand their day-to-day business
decisions. Similarly, the management should also keep the
interests of the true owners of the company in their mind.
• A clear communication should be sent out explaining the
rationale behind major business decisions to help shareholders
understand and appreciate changes if any. A robust corporate
policy can help to keep differences at bay.
 Conflict of Interest
• A conflict of interest arises when what is in a person’s
best interest is not in the best interest of another
person or organization to which that individual owes
loyalty.
• For example, an employee may simultaneously help
himself but hurt his employer by taking a bribe to
purchase inferior goods for his company’s use.
 Conflict of Interest-Situation
• Situation 1 – The rule against self-dealing
• Situation 2 – Conflict over clients in a related
business
• Situation 3 – Mixing personal and corporate
transactions
• Situation 4 – Making personal use of an opportunity
obtained through the company
• Situation 5 – Board member does two jobs with
conflicting oversight
 Conflict of Interest-Tiers
A Tier-I conflict is an actual or potential conflict between a
board member and the company. The concept is straightforward:
A director should not take advantage of his or her position. As
the key decision makers within the organization, board members
should act in the interest of the key stakeholders, whether
owners or society at large, and not in their own. Major conflicts
of interest could include, but are not restricted to, salaries and
perks, misappropriation of company assets, self-dealing,
appropriating corporate opportunities, insider trading, and
neglecting board work. (Individual directors vs. company)
 Conflict of Interest-Tiers
• Tier-II conflicts arise when a board member’s duty of
loyalty to stakeholders or the company is compromised.
This would happen when certain board members exercise
influence over the others through compensation, favors, a
relationship, or psychological manipulation. Even though
some directors describe themselves as “independent of
management, company, or major shareholders,” they may
find themselves faced with a conflict of interest if they are
forced into agreeing with a dominant board member.
(Directors vs. Stakeholders)
 Conflict of Interest-Tiers
• A Tier-III conflict emerges when the interests of stakeholder
groups are not appropriately balanced or harmonized.
Shareholders appoint board members, usually outstanding
individuals, based on their knowledge and skills and their
ability to make good decisions. When a board’s core duty is to
care for a particular set of stakeholders, such as shareholders,
all rational and high-level decisions are geared to favor that
particular group, although the concerns of other stakeholders
may still be recognized. (Stakeholders vs. other stakeholders)
 Conflict of Interest-Tiers
• Tier-IV conflicts are those between a company and society and
arise when a company acts in its own interests at the expense
of society. The doctrine of maximizing profitability may be
used as justification for deceiving customers, polluting the
environment, evading taxes, squeezing suppliers, and treating
employees as commodities. Companies that operate in this
way are not contributors to society. Instead, they are viewed as
value extractors. (Company vs. Society)
 Conflict of Interest-Case Study
• A primary school identifies the need for an education support officer
to assist in a classroom two days a week. The principal’s daughter is
studying early childhood development and is looking for part-time
work. The principal works with the assistant principal to determine a
position description for the education support officer, including the
time fraction and duties. He does not mention that his daughter
could be a potential applicant. When the role is advertised and his
daughter applies, the principal reports his conflict of interest (COI)
to the leadership team and removes himself from the selection panel.
When the panel recommends his daughter as the preferred
candidate, the principal asks the Regional Director to confirm the
panel’s recommendation. The principal’s daughter accepts the offer
of the role.
 Conflict of Interest-Case Study
• A primary school identifies the need for an education support officer
to assist in a classroom two days a week. The principal’s daughter is
studying early childhood development and is looking for part-time
work. The principal works with the assistant principal to determine a
position description for the education support officer, including the
time fraction and duties. He does not mention that his daughter
could be a potential applicant. When the role is advertised and his
daughter applies, the principal reports his conflict of interest (COI)
to the leadership team and removes himself from the selection panel.
When the panel recommends his daughter as the preferred
candidate, the principal asks the Regional Director to confirm the
panel’s recommendation. The principal’s daughter accepts the offer
of the role.
 Consequences of Unethical behaviour
• Ethical misconduct in any company can lead to very serious
consequences which can cause the company time and money
in trying to repair their business reputation and any legal
issues that may arise depending on the severity of the
situation.

• In order to really protect your company from an ethical

misconduct scandal, you need to incorporate a management
plan in order to stay on top of any unethical practices within
the corporate environment.
What Causes Poor Corporate Ethics?
• Demanding workloads which create high stress at work and at
home.
• Top executive poor management practices. If unethical behaviour
goes without consequence or you choose to promote these activities,
it can lead to continuous and more eratic behaviour.
• Money is a high contender as to why someone may choose to
undertake unethical behaviour, especially at the executive level.
Avoiding tax payments is one of the common misconducts that are
carried out by corporations which eventually lands them into major
trouble.
• No Code of Ethics. Employees are more likely to do wrong if they
don't know what's right.
 Consequences of Unethical behaviour
• Productivity Levels Decrease
• The main goal of any corporation is to drive through sales
from customers to maintain a strong presence in the business
world. Unfortunately, when a level of unethical behaviour
starts to form, it can cause productivity levels to decrease
which surround the person or corporation in question. When
this happens, errors start to form in a once productive
production line. This in turn can cause other employees to feel
unmotivated resulting in a complete slowdown of the sale
process that can lose you valuable time and money.
 Consequences of Unethical behaviour
• Loss Of Respect
• In episodes where managers or leaders start to make unethical
decisions, it can lead to employees losing a lot of respect for
their bosses. When this occurs, it can be difficult for the leader
to gain back the respect and trust that’s been lost. It also
causes problems for them to run a successful business when
their team feels as if they’re making poor corporate choices.
Employees may also feel resentful towards their leaders. This
is because, as a part of the company, they feel their reputation
is also starting to fall apart along with the business’s
reputation.
 Consequences of Unethical behaviour
• Loss Of Public Credibility
• When unethical behaviour occurs in a corporate setting,
there’s a high chance it will be publicized. This in turn can
cause your company to lose its credibility, resulting in
customers abandoning sales with you, bad-mouthing your
business, and not holding respect for you anymore. To gain
credibility back a corporation needs to create a well-planned
rebranding and marketing campaign, along with hiring a
public relations team to help improve their reputation. This
can lead to millions of dollars in costs, especially if you’re a
well know and worldwide organization.
 Consequences of Unethical behaviour
• Legal Issues
• In severe cases of unethical misconduct, it can lead to severe
legal issues that result in loss of time, large fines, and other
penalties with possible jail time. The cost of legal battles can
go on for months to years and can lead into the millions of
dollars depending on the corporation’s particular situation and
level of unethical behaviour. In addition to this, executive who
break the law can lead employees to also follow in pursuit in
facing criminal charges.
 Consequences of Unethical behaviour
• How to Prevent Unethical Behaviour In Corporations
1. Setting realistic goals for employees to meet
2. Create policies and practices which promote good ethical
behaviour
3. Select high quality people to add to your team that have a
good reputation of work ethics in previous employment.
4. Train people on good ethical behaviour by implementing
training sessions on a yearly basis to maintain strong ethical
behaviours.
 Consequences of Unethical behaviour
5. Maintaining strong ethical behaviour at a higher executive
level to ensure employees maintain strong respect and good
work ethics.
6. Build a corporate culture that’s based on communication,
openness, and transparency.
7. Put controls in place such as progress audits to assess
employees work efficiency and behaviour if complaints arise.
Examples of Poor Corporate Ethics
• Executives approve an employee to cut corners to complete a
job on time against set guidelines.
• An executive takes money from the company on the side to
use in his own agenda on the side.
• Employee takes a sick day when they aren’t actually sick to
spend the day shopping or at the beach.
• Executives or employees engage in an affair with a CEO or
married co-worker that’s associated with the company without
ending their current relationship first.
• Employees clock in late or leave half an hour early before the
working day is through.