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Conceptual Framework Of Corporate Governance N K Jain B.Sc, LLB.,DCL,FCS,FCPS Corporate Advisor Cell: 09818348811 Landline: 0120 - 4263965

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Presentation on theme: "Conceptual Framework Of Corporate Governance N K Jain B.Sc, LLB.,DCL,FCS,FCPS Corporate Advisor Cell: 09818348811 Landline: 0120 - 4263965"— Presentation transcript:

1 Conceptual Framework Of Corporate Governance N K Jain B.Sc, LLB.,DCL,FCS,FCPS Corporate Advisor Cell: Landline:

2 What is a Company? A company is an artificial juristic person with perpetual succession. The shareholders of a company may come and go but the existence of a company remains and continues. The liability of shareholders is limited. A company may own, acquire and sell property and enter into contracts

3 What is a Company? A Certificate of Incorporation is issued by the Registrar of Companies upon formation of a company, as a proof of incorporation. The company’s objects are contained in its “Memorandum of Association”. The rules and regulation for internal governance of the company are contained in the “Articles of Association”

4 Types of Company One Person Company Private company Public company Unlisted company Listed company Company with limited liability Company with unlimited liability Company limited by guarantee

5 Broad structure of a Company Shareholders—owners Board of Directors—oversight function Chairman—to chair Board/general meetings Independent Directors/Non-EDs--objectivity Management—for day-to-day functions MD/CEO— to implement Board policies EDs-- to implement Board policies Senior Management Team--do

6 America’s Hall of Shame WorldCom improperly booked USD 3.8 billion in expenses. The founder, Bernie Ebbers,borrowedUSD408 million from the phone company to cover debts. Enron, created outside partnerships that helped hide its poor financial condition. Executives earned millions of dollars selling company stocks. The company had to go to bankruptcy court

7 America’s Hall of Shame Anderson, an accounting firm was accused of shredding Enron documents and was convicted for obstruction of justice. SEC sued executives of a garbage company, Waste Management for massive accounting fraud that resulted in a USD 17 billion restatement of earnings. Its auditor was Arthur Anderson

8 Series of Indian Scams Harshad Mehta’s securities scam Preferential Allotment Scam Vanishing Companies scam Plantation companies scam Non-banking finance companies scam Mutual fund scam IT scam Satyam scandal

9 Introduction- Corporate Governance Corporate is derived from a Latin term “corpus” which means a “body”. Governance means administering the processes and systems placed for satisfying stakeholders expectations. CG means a set of systems, procedures, policies, practices & standards put in place by a corporate to ensure transparent, honest and smooth relationship with its stakeholders

10 Introduction-CG The four pillars of CG are:-  Transparency  Disclosure  Accountability; and  Integrity Mere legislation does not ensure good governance; it flows from ethical business practices even when there is no legislation

11 Definitions of CG There is no universal definition of CG. Some good definitions of CG are captured:- Noble laureate Milton Friedman defined CG as “the conduct of business in accordance with shareholders’ desire, which is to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs”

12 Definitions of CG James D Wolfensohn (9 th President of World Bank): “CG is about promoting corporate fairness, transparency and accountability”. OECD: “A system by which business corporations are directed and controlled”. Cadbury Committee, UK: “ It is the system by which companies are directed and controlled”

13 Definitions of CG CII-Desirable CG Code(1998) “CG deals with laws, procedures, practices and implicit rules that determine a company’s ability to informed decisions vis-a-vis its claimants-in particular, its shareholders, creditors, customers, the State and employees. There is a global consensus about the objective of good CG: maximising long-term shareholder value”

14 Definitions of CG Report of Kumar Mangalam Birla Committee on CG constituted by SEBI(1999) “Strong CG is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure”

15 Definitions of CG Report of Narayana Murthy Committee on CG constituted by SEBI(2003) “CG is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of the company”

16 Definitions of CG The Institute of Company Secretaries of India(2003) “CG is the application of best management practices, compliance of law in true letter and sprit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”

17 CG- Kautilya’s Arthashastra Kautilya’s Arthashastra maintains that for good governance, all administrators including the King were considered servants of the people. Good governance and stability were completely linked. If rulers are responsive, accountable and removable, there is stability. These tenets hold good even today

18 CG- Kautilya’s Arthashastra The substitution of State with Corporation, the Council of Advisors of the King with the Board of Directors, the King with CEO and the subjects with the shareholders bring out similarity in CG structures. Central to the concept of CG is that public good should be ahead of private good and that the corporation’s resources cannot be used for personal benefit

19 CG- Kautilya’s Arthashastra Kautilya’s four fold duty of a King:-  Raksha: means protection-risk management.  Vriddhi: means growth-stakeholder value enhancement.  Palana: means compliance-compliance to the law in letter and sprit.  Yogakshema: means well being-corporate social responsibility

20 Stakeholders Shareholders Employees Vendors Creditors Customers Government & Regulators Banks & Financial Institutions Local Community and Society at large

21 Need for CG CG is integral to the existence of a company. Corporate Performance: Improved governance structures and processes help ensure quality decision making, encourage effective succession planning and enhance the long term prosperity of companies. This can be linked with improved corporate performance in terms of share price or profitability or higher sales at better price

22 Need for CG Enhanced Investor Trust: Investors take CG as important as financial performance when evaluating companies for investment. Companies with high level of transparency & disclosure attract more investors and funds. McKinsey determined that global institutional investors are prepared to pay a premium of up to 40% for shares in companies with superior CG practices

23 Need for CG Better access to Global Markets: Good CG systems attract investments from global investors, which leads to greater efficiency in the financial sector. Easy Finance from Institutions: Evidence indicated that well governed companies receive higher market valuations. The credit worthiness of a company can be trusted on the basis of CG practiced in the company

24 Need for CG Enhancing Enterprise Valuation: Improved management accountability and operational transparency fulfil investors’ expectations and confidence on management and companies and increase the value of corporations. Combating Corruption: In companies with sound system of transparency and disclosure corruption fades out and fraud & malpractices are prevented more efficiently

25 Need for CG Risk Mitigation: Effective CG ensures risk mitigation system in place making the Board aware of all the risks involved and to place various control systems to monitor the risks. Accountability: Investor relations’ is essential part of good CG. The company is obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor relation

26 CG Theories Following theories elucidate the basis of CG:  Agency Theory  Shareholder Theory  Stakeholder Theory  Stewardship Theory

27 CG Theories Agency Theory  Owners are the principals who authorise the managers to act as ‘Agents’. The managers, directly or indirectly, selected by shareholders pursue the objectives set out by the owners.  The principals, through Board of Directors, put a proper system of CG in place regarding timely disclosures, monitoring and oversight

28 CG Theories Shareholder Theory  A corporation is considered as the property of shareholders and they want maximum return on their investment. But the managers while meeting this objective need to ensure that the corporation is in compliance with ethical and legal standards set out by the government.  Managers should, therefore, exercise due diligence, care and avoid conflict of interest

29 CG Theories Stakeholder Theory  A corporation exists for all the interest groups and their conflicting views be considered and diverse interest be protected.  Corporations & managers are responsible to mediate between these different stakeholders interest with integrity. The managers assume the role of faithful agents of all stakeholders and not only shareholders

30 CG Theories Stewardship Theory  The word ‘Steward’ means a person who manages another’s property or estate like a caretaker. This theory is value based.  The managers manage the corporation as if it is their own corporation. They are not agents as such but occupy a position of stewards.  Values are identified, training is provided and moral support is extended to the managers

31 THANK YOU N K Jain B.Sc, LLB.,DCL,FCS,FCPS Corporate Advisor Cell: Landline:


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