UNIT1 :Corporat

e Governance
-PROF.SAILY TALODHIKAR
SYLLABUS


1. Conceptual Framework of Corporate
Governance: Introduction, Need and
Scope Evolution of Corporate Governance,
Developments in India. Corporate
Governance Code and Agency Theory.
Elements of Good Corporate Governance,
Recent Corporate Governance Committee
reports like N. R. Narayan Murthy
Committee, J. J. Irani Committee etc.
Introduction
 Corporate governance is the system of
rules, practices, and processes by which
a company is directed and controlled.
 Boards of directors are responsible for
the governance of their companies.
 The shareholders' role in governance is
to appoint the directors and the
auditors and to satisfy themselves that
an appropriate governance structure is
in place.
Examples
Infosys
This IT giant is often cited as a benchmark for corporate governance
in India. Its model is built on the pillars of transparency, integrity,
and shareholder value.
Tata Group
This renowned group follows the Tata model, which emphasizes the
significance of ethics, integrity, and accountability.
Mahindra Group
This group embraces the Mahindra model, which places a strong
emphasis on the empowerment of stakeholders and employees.
Apple Inc., Google, and Walmart. Each of these companies has a
different way of distributing power within the company in regard to
its own corporate governance structure.
Need and Scope of CG

 Corporate governance is important because it

creates a system of rules and practices that
determines how a company operates and how
it aligns with the interest of all its stakeholders.
 Good corporate governance fosters ethical
business practices, which lead to financial
viability.
Need of CG

•Promotes trust and transparency

•Encourages ethical behavior
•Improves decision-making
•Reduces risk
•Improves performance
•Boosts board efficiency
•Helps retain staff
•Supports economic growth
•Helps a company adapt to change
Conceptual Frame of Corporate Governance
A corporation is a legal entity created by individuals,
stockholders, or shareholders, with the purpose of operating
for profit. Corporations are allowed to enter into contracts, sue
and be sued, own assets, remit federal and state taxes, and
borrow money from financial institutions.
Corporations are owned by their stockholders (shareholders)
who share in profits and losses generated through the firm's
operations, and have three distinct characteristics
(1) Legal existence: a firm can (like a person) buy, sell, own,
enter into a contract, and sue other persons and firms, and be
sued by them. It can do well and be rewarded, and can
commit offence and be punished.
(2) Limited liability: a firm and its owners are limited in their
liability to the creditors and other obligors only up to the
resources of the firm, unless the owners give personal-
guaranties.
(3) Continuity of existence: a firm can live beyond the life
spans and capacity of its owners, because its ownership can
 Corporate
entities Large businesses or entities
Shareholders

wners/members No limits on the number of owner

owners; but in certain cases like frauds, members or partners

Separate legal entity from owners

g members of the company Board of Directors, overseeing the

Shareholders’ meeting required o

recording of minutes

nts are to be fulfilled; paperwork is also less as compared to A lot of legal requirements are
paperwork

mited, etc. A number of variations depending on the different

Inc. or Corp. usually

A lot of agreements are requ

eements is required to meet legal obligations
existence as well as fulfill various

n is allowed. Profit or loss is to be passed through to the

No pass-through taxation is allowe
of the owners/members
 Scope
 1. Value based corporate culture: For any organization to run in effective
way, it needs to have certain ethics, values
 2. Holistic view: This holistic view is more or less godly, religious attitude
which helps in running organization. It is not easier to adopt it, it needs
special efforts and once adopted it leads to developing qualities of
nobility, tolerance and empathy.
 3. Compliance with laws: Those companies which really need progress,
have high ethical values and need to run long run business they abide and
comply with laws of Securities Exchange Board of India (SEBI), Foreign
Exchange Regulation Act, Competition Act 2002, Cyber Laws, and Banking
Laws etc.
 4. Disclosure, transparency, and accountability: Disclosure, transparency
and accountability are important aspect for good governance. Timely and
accurate information should be disclosed on the matters like the financial
position, performance etc
 5. Corporate Governance and Human Resource Management: For any corporate
body, the employees and staff are just like family. For a company to be perfect the
role of Human Resource Management becomes very vital, they both are directly
linked. Every individual should be treated with individual respect, his achievements
should be recognized. Each individual staff and employee should be given best
opportunities to prove their worth and these can be done by Human Resource
Department. Thus in Corporate Governance, Human Resource has a great role.
 6. Innovation: Every Corporate body needs to take risk of innovation i.e. innovation
in products, in services and it plays a pivotal role in corporate governance.
 7. Necessity of Judicial Reform: There is necessity of judicial reform for a good
economy and also in today’s changing time of globalization and liberalization. Our
judicial system though having performed salutary role all these years, certainly are
becoming obsolete and out-dated over the years
 8. Globalization helping Indian Companies to become global giants based on good
governance: In today’s age of competition and due to globalization our several Indian
Corporate bodies are becoming global giants which are possible only due to good
corporate governance.
 9. Lessons from Corporate Failure: Every story has a moral to learn from, every
failure has success to learn from, in the same way, corporate body have certain
Corporate Governance Code
 What Is the Corporate Governance Code?
 Using best practices as its foundation, the Corporate
Governance Code outlines the standards for the expectations
for corporate boards in protecting shareholder investments.
The code refers to standards for good practices relating to:
1. Board composition
2. Board development
3. Remuneration
4. Accountability
5. Audit
6. Shareholder relations
Five Pillars of Good Corporate Governance

 Leadership

 The code requires companies to ensure to shareholders

that they have an effective board of directors that’s
capable of providing e
 Effectiveness

 The code requires corporate boards to ensure that they

have a composition that encompasses the appropriate
balance of skills, experience, independence and
knowledge of the company excellence in board
leadership.
 Accountability

 The board is wholly accountable for the actions and

decisions of the company. The board should make
annual disclosures to shareholders that represent a fair,
accurate and comprehensive assessment of the
corporation’s positions and corporate outlook.

 Remuneration

 The United Kingdom favors remuneration packages that

are designed to promote the long-term success of the
company and that are directly aligned with
performance.
 Shareholder Relationships

 Boards should utilize their annual general meetings to communicate

and engage with investors on their objectives and strategic planning.
 Agency Theory
 According to the theory of the relationship between principals
(owners) an

 d agents (managers) – principal-agent theory – owners hires

managers to run the firm on their behalf.
 It must be remembered – that present day companies do not have
owners in the traditional sense
 Agency Theory

• Definition: Agency theory examines the relationship between

principals (owners) and agents (managers), where owners hire
managers to run firms on their behalf.
• Example: Shareholders elect a board of directors to oversee
corporate management, as seen in public corporations like Apple
or Microsoft.
• Modern Ownership: In contemporary businesses, true ownership is
often diluted among numerous shareholders who act as investors
rather than direct owners.
• Example: In large corporations like Procter & Gamble, individual
shareholders have minimal influence over day-to-day operations.
 Agency Problems
• Conflict of Interests: The separation of ownership and
control can lead to conflicts, primarily between
shareholders and managers.
• Example: Managers may prioritize personal perks and
job security over maximizing shareholder value, as
observed in cases of excessive executive
compensation.
• Stakeholder Perspective: Agency theory sees the
company's existence as a "nexus of contracts," needing
compromises among various stakeholders.
• Example: Shareholder agreements that stipulate
dividend policies or investment strategies reflect this
perspective.
 Agency Costs
Definition: Agency costs arise from conflicts between stakeholders,
including monitoring, bonding, and residual losses.
Example: A company spending to implement an executive compensation
plan tied to performance metrics is an instance of bonding expenditure.
Components of Agency Costs:
Monitoring Expenditures: Costs incurred by shareholders to oversee
management.
Example: Hiring external auditors to review financial statements.
Bonding Expenditures: Costs incurred by managers to signal they will act
in shareholders' interests.
Example: Managers offering stock options as part of their
compensation.
Residual Loss: Reduction in value due to suboptimal management
decisions.
Example: A manager’s decision to pursue a low-risk project for
personal job security, leading to lower returns for shareholders.
 Solutions to Agency
Incentive Alignment: Align managerial interests with those of shareholders,
oftenProblems
through stock options or equity compensation.
• Example: Google provides stock options to its executives, motivating them
to enhance stock performance.
Monitoring Mechanisms: Strengthening corporate governance structures to
ensure accountability.
• Example: Corporate governance policies that mandate regular reviews of
management performance by the board.
 Conflicts of Interest
Shareholder vs. Manager Conflicts: Managers may prioritize their job security
and personal goals over shareholder returns.
• Example: A CEO might refuse to downsize the workforce during mergers,
despite potential cost savings for shareholders.
Creditors vs. Managers: Conflicts arise regarding risk, dividends, and project
selection.
• Example: A heavily indebted company may forgo profitable but risky
 Conflicts of Interest
• Shareholder vs. Manager Conflicts: Managers may
prioritize their job security and personal goals over
shareholder returns.
• Example: A CEO might refuse to downsize the
workforce during mergers, despite potential cost
savings for shareholders.
• Creditors vs. Managers: Conflicts arise regarding risk,
dividends, and project selection.
• Example: A heavily indebted company may forgo
profitable but risky investments to avoid
bankruptcy, hurting shareholders’ interests.
Key Components to Limit Conflicts
1. Effective Compensation Models: Linking pay to
performance metrics to align interests.
1. Example: Companies like Amazon use performance-
based stock compensation to incentivize executives.
2. Debt Financing: Utilizing leverage to limit free cash flow,
thus constraining managerial slack.
1. Example: Disney's acquisitions often involve financing
strategies that increase debt levels to hold
management accountable.
3. Shareholder Rights: Empowering shareholders to vote on
critical decisions.
1. Example: Activist investors like Carl Icahn influencing
board decisions in companies like Apple.
1. Strong Board Oversight: Establishing an independent board to oversee
management interests.
1. Example: Procter & Gamble’s board has independent directors who can
challenge management decisions.
2. Regulatory Compliance: Adhering to regulations that govern financial
disclosures and corporate practices.
1. Example: The Sarbanes-Oxley Act instituted after the Enron scandal
imposes strict regulations on corporate governance to protect investors.
 By understanding agency theory and its implications, organizations can
implement strategies that minimize conflicts and align the interests of
various stakeholders, ultimately enhancing corporate governance and firm
performance.
 Elements of Good

Corporate
1. Accountability
Governance
• Ensuring that decision-makers in a company are accountable for
their actions and decisions.
• The board of directors is responsible for overseeing the
company's management and ensuring it works in the best
interests of stakeholders.
 2. Transparency
• Providing accurate, timely, and clear information to stakeholders
about the company's activities, performance, and governance.
• Promotes trust and confidence in the company.
 3. Fairness
• Treating all shareholders, employees, and other stakeholders
equitably and without favoritism.
• Ensuring fair treatment for minority shareholders and fair
distribution of the company's profits.
 4. Responsibility
• Adherence to legal and ethical standards in decision-making and
company operations.
• Corporate social responsibility (CSR) ensures that companies are
mindful of their impact on the environment and society.
 5. Independence
• Independence of the board and committees to avoid conflicts of
interest.
• Independent directors play a crucial role in unbiased decision-making
and safeguarding stakeholders' interests.
 6. Leadership
• Strong and effective leadership that sets the strategic direction of the
company and upholds governance standards.
• Clear separation of roles between the CEO and Chairperson to prevent
the concentration of power.
 7. Risk Management
• Establishing robust risk management systems to identify
and mitigate financial, operational, and compliance risks.
• Ensuring the company has strategies to cope with
unforeseen challenges.
 8. Ethical Conduct
• Promoting an ethical culture within the company by
establishing and adhering to a code of ethics.
• Encouraging ethical behavior at all levels of the
organization.
 9. Stakeholder Engagement
• Engaging with all stakeholders, including shareholders,
employees, customers, suppliers, and the broader
community.
• Understanding and addressing their concerns and
interests in decision-making processes.
Reports on N. R. Narayan
Murthy Committee (2003)
• Independent Directors: Recommended that at least 50% of the Board of
directors of listed companies should comprise independent directors.
• Audit Committees: Suggested that the audit committee should comprise only
non-executive directors with a majority being independent, enhancing
oversight.
• Corporate Governance Mechanism: Emphasized the need for a more
effective corporate governance framework that promotes transparency and
accountability.
• Code of Conduct: Proposed that companies should adopt a code of conduct
for their directors and senior management.
• Disclosure Requirements: Recommended enhanced disclosure requirements
regarding financial statements and related-party transactions.
Reports on J. J. Irani
Committee (2005)

• Corporate Structure: Advocated for a balance between managerial

autonomy and accountability in corporate governance structures.
• Board Composition: Suggested a balanced mix of executive and
non-executive directors to enhance decision-making.
• Shareholder Rights: Emphasized protecting the rights of minority
shareholders and ensuring equitable treatment in all corporate
decisions.
• Corporate Social Responsibility (CSR): Highlighted the importance
of corporate social responsibility in enhancing company
reputations and stakeholder engagement.
• Regulatory Framework: Recommended a simplified regulatory
framework for the ease of doing business and to promote
corporate governance.
 THANK YOU!