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CORPORATE GOVERNANCE Zeenat Jabbar

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Page 1: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

CORPORATE GOVERNANCE

Zeenat Jabbar

Page 2: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

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 everyone’s interests. This chapter discusses the theoretical basis, mechanisms and the divergent models of corporate governance and culminates in the identification of an ideal corporation.

Page 3: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

OUTLINE

The Concept of CorporationTheoretical Basis of Corporate GovernanceAgency TheoryStewardship TheoryStakeholder TheoryCorporate Governance MechanismsCorporate Governance SystemsIndian Model of Governance What Is Good Corporate GovernanceObligation to Society at LargeObligation to InvestorsObligation to EmployeesObligation to CustomersManagerial Obligation

Page 4: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

What is a Corporate?

The term “corporate” refers to an association of many persons, who contribute money or money’s 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.

Page 5: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

What is Governance?

Governance is the process of decision

making and the process by which decisions are implemented or not implemented.

Page 6: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Characteristics of a Corporation

o Incorporated Associationo Artificial Legal Existenceo Perpetual Existenceo Common Sealo Extensive Membershipo Separation of Management and

Ownershipo Limited Liabilityo Transferability of shares

Page 7: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Theoretical Basis of Corporate Governance

o Agency Theoryo Problems with the Agency Theoryo Stewardship Theoryo Shareholder Vs Stakeholder Approacheso Stakeholder Theoryo Criticisms of the Stakeholder Theoryo Sociological Theory

Page 8: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Behavioural DifferencesTHEORY AGENCY STEWARDSHIP

Managers act as Agents Stewards

Governance Approach Materialistic Sociological and Psychological

Behaviour Pattern o Individualistico Opportunistic o Self-serving

o Collectivistic o Pro-organisational o Trustworthy

Managers motivated by Their own objectives

Principal’s objectives

Manager’s and Principal’s Interests

Differ Converge

Management Structures Monitor and control

Facilitate and empower

Owners’ Attitude Risk Avoidance Risk taken

Principal – Manager Relationship based on

Control Trust

Page 9: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Psychological Mechanisms

PSYCHOLOGICALRESPONSES AGENCY THEORY

STEWARDSHPTHEORY

Motivation o Lower order needs o Extrinsic needs

o Higher order needs o Intrinsic needs

Social comparison Compatriots Principal

Attachment Little attachment to company

Great attachment to company

Power Institutional Personal

Page 10: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Situational MechanismsSITUATIONALRESPONSES AGENCY THEORY

STEWAREDSHIPTHEORY

Management Philosophy

Control oriented Involvement oriented

While dealing with increasingUncertainty and risk

Greater controls More supervisions

Training and empowering people Making jobs to be more challenging and motivating

Risk orientation Through a system of control

Through trust

Time frame Short term based Long term based

Objective Cost control Improving performance

Cultural differences Individualism Large power

distance

Collectivism Small power

distance

Page 11: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Corporate Governance Mechanisms

o The Importance of Corporate Governanceo Contemporary Corporate Governance Situationo Growing Awareness and Societal Responses

Corporate Governance Systems

o Anglo-American Modelo The German Modelo The Japanese Modelo Indian Model of Corporate

Governance

Page 12: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Fig.1 : The Anglo-American Model

Company

Officers(Managers)

Board of Directors(Supervisors)

Legal/Regulatory System

Stakeholders

Creditors

ShareholdersElect

Monitors & Regulates

Lien on

Own

Stake in

Appoints & Supervises

Manage

Page 13: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Fig.2 : The German Model

Company

Management Board(Including Labour Relations Officer)

Supervisory Board

Employees and

Labour Unions

Shareholders

Appoints and Supervises

Appoint – 50%

Appoint – 50%

Manage

Page 14: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Fig.3 : The Japanese Model

Company

Executive Management(Primarily Board of

Directors)

President

Supervisory Board(Including President)

Main Bank

Shareholders

Provides Loans

elect

Ratifies the President’sDecisions

Consults

Manages

Provides Loans

Owns

Own

Provides Managers

Monitors & Acts in

Emergencies

Page 15: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Fig.4 : Indian Corporate Governance Model

External Environment

Government Regulations, Corporate Culture, Structure,Policies, Guidelines etc. Characteristics, Influences

Company Acts Depositors, Borrowers,SEBI Customers and otherStock Exchanges External Stakeholders

Internal Environment

Company vision; mission, policies, norms

Internal Auditors Stakeholders Board of Directors

Proper governance Shareholder value

Corporate Governance Outcomes / Benefits to Society

Transparency

Investor protectionConcern for customer

Healthy corporate sector development

CORPORATEGOVERNANCE

SYSTEM

Page 16: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

What Is Good Corporate Governance?

Obligation to society at large

o National Interest

o Political Non-alignment

o Legal Compliances

o Rule of Law

o Honest and Ethical Conduct

o Corporate Citizenship

o Ethical Behaviour

o Social Concerns

o Corporate Social Responsibility

Page 17: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Obligation to investors

o Environment-friendliness

o Health, Safety and Working Environment

o Competition

o Trusteeship

o Accountability

o Effectiveness and Efficiency

o Timely Responsiveness

o Corporations Should Uphold the Fair Name of the Country

o Towards Shareholders o Measures Promoting Transparency and Informed

Shareholder Participationo Transparencyo Financial Reporting and Records

Page 18: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

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

Page 19: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

o Participation

o Empowerment

o Equity and Inclusiveness

o Participative and Collaborative Environment

Managerial obligation

o Protecting Company’s 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

Page 20: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Johnson & Johnson’s excellent Credo exemplarily epitomises what an ideal

corporate should aspire to be.

Our Credo

We believe our first responsibility is to the doctors, nurses and patients,

to mothers and fathers and all others who use our products and services.

In meeting their needs everything we do must be of high quality.

We must constantly strive to reduce our costsin order to maintain reasonable prices.

Customers' orders must be serviced promptly and accurately.

Our suppliers and distributors must have an opportunity to make a fair profit.

Page 21: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

We are responsible to our employees,the men and women who work with us throughout the world.

Everyone must be considered as an individual.We must respect their dignity and recognize their merit.

They must have a sense of security in their jobs.Compensation must be fair and adequate,

and working conditions clean, orderly and safe.We must be mindful of ways to help our employees fulfill their family responsibilities.

Employees must feel free to make suggestions and complaints.There must be equal opportunity for employment, development

and advancement for those qualified.We must provide competent management,and their actions must be just and ethical.

Page 22: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

We are responsible to the communities in which we live and workand to the world community as well.

We must be good citizens – support good works and charitiesand bear our fair share of taxes.

We must encourage civic improvements and better health and education.We must maintain in good order

the property we are privileged to use,protecting the environment and natural resources.

Our final responsibility is to our stockholders.Business must make a sound profit.

We must experiment with new ideas.Research must be carried on, innovative programs developed and mistakes paid for.

New equipment must be purchased, new facilities provided and new products launched.

Page 23: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

Reserves must be created to provide for adverse times.When we operate according to these principles,

the stockholders should realize a fair return.

Johnson & JohnsonCorporate Governance in

IndiaProblemso Inadequate Sanction and Enforcement.o No clear demarcation of control mechanisms

between SEBI, DCA and Stock Exchanges.o Lack of Professionalism of Directorso Institutional Investors show poor commitmento Indian boards are not professionalo Unindependent Independent directorso Whistle Blower Policy not in place

Page 24: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

o Too many unlisted companieso Accounting gimmickso Poor Shareholder participationo Obliging auditorso Soft State, lethargic judiciary, inefficient market

regulator, poor enforcement machinery, and a value system which is indifferent to moral turpitudes.

Page 25: CORPORATE GOVERNANCE Zeenat Jabbar. OBJECTIVES Over the past three decades, the concept of corporate governance has gone through a metamorphosis. Theoretically,

However things are improving nowo The market is competition – driveno Professional new players are coming ino High growth in market – capitalisationo Well-focussed, well-researched portfolio investorso Media influences o Influence of banks and financial institutionso Realisation among Indian companies of the benefits

of corporate governance ando Impending Capital Account Convertibility will exert its

own pressure.