internal corporate
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Internal corporate governance
mechanism
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Internal corporate control is a process, effected by an entitysboard of directors, management and other personnel, designed
to provide reasonable assurance regarding the achievement of
objectives in the following categories:
Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and regulations
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Internal corporate governance
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OBJECTIVE
Internal controls are established to further
strengthen:
The reliability and integrity of information. Compliance with policies, plans, procedures, laws and
regulations.
The safeguarding of assets.
The economical and efficient use of resources. The accomplishment of established objectives and goals for
operations or programs.
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INTERNAL GOVERNANCE MECHANISMS
Ownership Concentration
Relative amounts of stock owned by
individual shareholders and institutional
investors
Board of Directors
Individuals responsible
for representing the firms
owners by monitoring top-level
managers strategic decisions
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INTERNAL GOVERNANCE MECHANISMS
Executive Compensation
Use of salary, bonuses, and long-term
incentives to align managers interests with
shareholders interests
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INTERNAL GOVERNANCE MECHANISMS
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Large block shareholders have astrong incentive to monitormanagement closely:
Their large stakes make it worth
their while to spend time, effortand expense to monitor closely
They may also obtain Boardseats which enhances their ability
to monitor effectivelyFinancial institutions are legally
forbidden from directly holdingboard seats
OwnershipConcentration (a)
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(CONTD)
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Shareholder activism:
Shareholders can convene to
discuss corporations direction
If a consensus exists,shareholders can vote as a block
to elect their candidates to the
board
Proxy fights There are limits on shareholder
activism available to institutional
owners in responding to activists
tactics
OwnershipConcentration (b)
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(CONTD)
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Board of directors
Group of elected individuals that
acts in the owners interests to
formally monitor and control the
firms top-level executives
Board has the power to:
Direct the affairs of the
organization Punish and reward managers
Protect owners from managerial
opportunism
OwnershipConcentration
Board of Directors
(a)
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(CONTD)
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Composition of Boards: Insiders: the firms CEO and
other top-level managers
Related Outsiders: individuals
uninvolved with day-to-dayoperations, but who have arelationship with the firm
Outsiders: individuals who areindependent of the firms day-to-
day operations and otherrelationships
OwnershipConcentration
Board of Directors
(b)
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(CONTD)
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Forms of compensation:
Salary, bonuses, long-term
performance incentives, stock
awards, stock options
Factors complicating executive
compensation:
Strategic decisions by top-level
managers are complex, non-
routine and affect the firm over
an extended period
Other variables affecting the
firms performance over time
OwnershipConcentration
Board of Directors
Executive
Compensation
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INTERNATIONAL CORPORATE GOVERNANCE
Germany Owner and manager are often the
same in private firms
Public firms often have a dominant
shareholder, frequently a bank Frequently there is less emphasis on
shareholder value than in U.S.
firms, although this may be
changing
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INTERNATIONAL CORPORATE GOVERNANCE
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Responsible for the functions of
direction and management
Responsible for appointing
members to the Vorstand
Responsible for appointing
members to the Aufsichtsrat
Vorstand
Aufsichtsrat
Employees Unionmembers
Shareholders
Germany: (Two-tiered Board)
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INTERNATIONAL CORPORATE GOVERNANCE:
Japan
Important governance factors:
Obligation
Family
Consensus
Banks (especially main bank) are
highly influential with firms managers
Keiretsus: strongly interrelated groups
of firms tied together by cross-
shareholdings
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INTERNATIONAL CORPORATE GOVERNANCE
Japan (contd)
Other governance characteristics:
Powerful government intervention
Close relationships between firms and government sectors
Passive and stable shareholders who exert little control
Virtual absence of external market for corporate control
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DUTIESOFTHEDIRECTORS
Exercise care in the discharge of functions as Directors
Attend Board meetings and devote sufficient time and
attention to the affairs of the company
Not to be negligent and not to commit or let otherscommit tort-liable acts
(Tort -wrongful act that causes injury to a person or
property and for which the law allows a claim by the
injured party to recover damages -money)
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DUTIESOFTHEDIRECTORS
Not to misuse power
Protect the interests of creditors and employees
Maintain confidentiality
Not to exercise power for a collateral purpose Not to waste company assets
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ROLEOF CHAIRMAN
o Manage the board and conduct of meetings
o Good business and financial knowledge
o Maintain good relations with the Executive directors
Independent directors and CEO
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ROLEOF CEO WITHRESPECTTOBOARD
Good relationship with directors and Chairman
Assist the executive directors in presenting the strategic
proposals
To present the company to the investors To act as a representative of executive directors while
interacting with independent directors
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FUNCTIONSOFTHEBOARD
Strategic role
Policy making role - Like code of conduct
Monitoring and supervisory role
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COMMITTEESOFTHEBOARD
Audit committee
Compensation Committee
Nomination committee
Finance committee
Investors grievance committee
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CORPORATE CODE
Corporate Codes are the policy statements which guides
the behavior of employees based on the value systems of
the company.
The top management and board has the responsibility
prepare the Corporate Code
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TYPESOFCORPORATECODES
Compliance Code : Directive Statements which provide
guidance and prohibit certain kind conduct
Corporate Credos: The broad general statements of
corporate commitments relating to constituencies, values
and Objectives
Management Philosophy Statements : The formal
statements of companys value system
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TYPESOF COMPLIANCECODE
Special documents Code of conduct
Circulated letters about company policies foremployees while dealing business partners
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CODEOF CONDUCT
Companies' policy statements that define ethical standards for theemployee conduct
Code varies from company to company
Can take a number of formats and address any issue - like
workers' rights, behavior with customers . Codes of conduct create a proper environment to help identify
and reinforce within the firm those critical success factors whichimprove its capacity to compete in a rapidly changingenvironment.
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PROCESSOFCORPORATECODE
Identification of key behaviordeveloping the code
Review
Communicate the code
Implement Update
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WHISTLEBLOWER
A whistleblower is a person who tells the public or
someone in authority about alleged dishonest ormisconduct occurring in a organization.
The alleged misconduct which are reported, by andlarge, include an violation of law, rule, regulation or a
direct threat to public interest, such as fraud,
health/safety violations, and corruption
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KINDSOF WHISTLEBLOWERS
Internal whistle blowers - report misconduct on a fellow
employee or superior within their company.
Personal whistle blowers- blow the whistle on the
offender, here the charge is not against the organization
or system but against one individual
External whistle blowers -report misconduct on outsidepersons or entities.
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CRITERIA FOR JUSTIFIABLE WHISTLE BLOWING
1. The firm through its product or policy will do serious andconsiderable harm to the public, whether in the person of the user of
its product or the general public.
2. Once an employee identifies a serious threat to the user of a product
or to the general public, he or she should report it to his or her
immediate superior and make his or her moral concern known.
3. If one's immediate superior does nothing effective about the concern
or complaint, the employee should exhaust the internal proceduresand possibilities within the firm. This usually will involve taking the
matter up the managerial ladder, and if necessary and possible to the
board of directors.
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LEGALPROTECTIONFORWHISTLEBLOWING
Legal protection for whistle blowing varies from country to country.
For e.g.:-
The Whistleblower Protection Act of 1989 is a United States federal
law that protects federal whistleblowers
In 2003, the Law Commission of India recommended the adoption of
the Public Interest Disclosure Act, 2002 In the UK, the Public Interest Disclosure Act 1998 provides a
framework of legal protection for individuals who disclose
information so as to expose malpractice
In Jamaica, the Protected Disclosures Act, 2011 provides a
comprehensive system for the protection of whistleblowers inthe public and private sector
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