Corporate Governance basics for management.pptx

What is corporate governance?
Application of best management
practices, compliance of law in true letter
and spirit and adherence to ethical
standards for effective management and
distribution of wealth and discharge of
social responsibility for sustainable
development of all stakeholders in a
corporation.

Definition
The conduct of business in accordance
with shareholders’ desires which
generally is to make as much money as
possible, while conforming to the basic
rules of the society embodied in law and
local customs.
--------Milton Friedman (1962)

Objectives
 Properly structured board of directors
 Take care of stakeholders
 Transparent procedures and decisions
 Effective machinery to subserve the concerns
of stake holders
 Inform shareholders of relevant developments
impacting the company
 Board effectively and regularly monitors the
functioning of the management team
 Effectively control the affairs of the company

Need and importance
Rise in institutional investors and in turn
safeguard their internet.
Increasing number of takeovers and mergers
in corporate world
Advent of investigating reporting in business
journalism
Increasing activism of regulatory bodies such
as SEBI
Increasing need for running corporations with
power and accountability

Features of good corporate
governance
Transparency in decision
Integrity of management
Accountability of the board
Commitment level
Adequacy of the process
Adherence to corporate rules
Quality level of corporate reporting
Extent and level of stakeholder
participation

Advantages of good corporate
governance
Stability and growth
Builds confidence in stakeholders
Reduces perceived risk
Leverage competitive advantage
Long term sustenance
Makes corporation a good corporate
citizen

OECD emphasis
Pursuant to Article 1 of the Convention signed in Paris on
14th December 1960, and which came into force on 30th
September 1961, the Organisation for Economic Co-
operation and Development (OECD) shall promote
policies designed:
 to achieve the highest sustainable economic growth and
employment and a rising standard of living in member
countries, while maintaining financial stability, and thus to
contribute to the development of the world economy;
 to contribute to sound economic expansion in member
as well as non-member countries in the process of
economic development; and
 to contribute to the expansion of world trade on a
multilateral, non-discriminatory basis in accordance with
international obligations.

OECD
 The original member countries of the OECD are Austria,
Belgium, Canada, Denmark, France, Germany, Greece, Iceland,
Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States. The following countries became members
subsequently through accession at the dates indicated
hereafter: Japan (28th April 1964), Finland (28th January 1969),
Australia (7th June 1971), New Zealand (29th May 1973), Mexico
(18th May 1994), the Czech Republic (21st December 1995),
Hungary (7th May 1996), Poland (22nd November 1996), Korea
(12th December 1996) and the Slovak Republic (14th December
2000). The Commission of the European Communities takes part
in the work of the OECD (Article 13 of the OECD Convention)

Issues in corporate governance
 Getting the Board Right
 Performance Evaluation of Directors
 True Independence of Directors
 Removal of Independent Directors
 Accountability to Stakeholders
 Executive Compensation
 Founders' Control and Succession Planning
 Risk Management
 Privacy and Data Protection
 Board's Approach to Corporate Social
Responsibility (CSR)

Getting the Board Right
 Enough has been said on board and its role as the cornerstone for good
corporate governance. To this end, the law requires a healthy mix of
executive and non-executive directors and appointment of at least one
woman director for diversity. There is no doubt that a capable, diverse
and active board would, to large extent, improve governance standards of
a company. The challenge lies in ingraining governance in corporate
cultures so that there is improving compliance "in spirit". Most
companies' in India tend to only comply on paper; board appointments
are still by way of "word of mouth" or fellow board member
recommendations. It is common for friends and family of promoters (a
uniquely Indian term for founders and controlling shareholders) and
management to be appointed as board members. Innovative solutions
are the need of the hour – for instance, rating board diversity and
governance practices and publishing such results or using performance
evaluation as a minimum benchmark for director appointment.

Performance Evaluation of Directors
 Although performance evaluation of directors has been part of the
existing legal framework in India, it caught the regulator's
attention recently. In January 2017, SEBI, India's capital markets
regulator, released a 'Guidance Note on Board Evaluation'.This
note elaborated on different aspects of performance evaluation by
laying down the means to identify objectives, different criteria and
method of evaluation. For performance evaluation to achieve the
desired results on governance practices, there is often a call for
results of such evaluation are made public. Having said that,
evaluation is always a sensitive subject and public disclosures
may run counter-productive. In a peer review situation, to avoid
public scrutiny, negative feedback may not be shared.To negate
this behaviour, the role of independent directors in performance
evaluation is key.

True Independence of Directors
 Independent directors' appointment was supposed to be the
biggest corporate governance reform. However, 15 years down
the line, independent directors have hardly been able to make
the desired impact.The regulator on its part has, time and again,
made the norms tighter – introduced comprehensive definition
of independent directors, defined a role of the audit committee,
etc. However, most Indian promoters design a tick-the-box way
out of the regulatory requirements.The independence of such
promoter appointed independent directors is questionable as it
is unlikely that they will stand-up for minority interests against
the promoter. Despite all the governance reforms, the regulator
is still found wanting. Perhaps, the focus needs to shift to limiting
promoter's powers in matters relating to in independent
directors.

Removal of Independent Directors
 While independent directors have been generally criticised for
playing a passive role on the board, instances of independent
directors not siding with promoter decisions have not been taken
well – they were removed from their position by promoters.
Under law, an independent director can be easily removed by
promoters or majority shareholders.This inherent conflict has a
direct impact on independence. In fact, earlier this year, even
SEBI's International Advisory Board proposed an increase in
transparency with regard to appointment and removal of
directors.To protect independent directors from vendetta action
and confer upon them greater freedom of action, it is imperative
to provide for additional checks in the process of their removal –
for instance, requiring approval of majority of public
shareholders.

Accountability to Stakeholders
 Empowerment of independent directors has to be
supplemented with greater duties for, and accountability of
directors. In this regard, Indian company law, revamped in
2013, mandates that directors owe duties not only towards
the company and shareholders but also towards the
employees, community and for the protection of
environment. Although these general duties have been
imposed on all directors, directors including independent
directors have been complacent due to lack of enforcement
action.To increase accountability, it may be a good idea to
require the entire board to be present at general meetings
to give stakeholders an opportunity to interact with the
board and pose questions.

Executive Compensation
 Executive compensation is a contentious issue especially when
subject to shareholder accountability. Companies have to offer
competitive compensation to attract talent. However, such
executive compensation needs to stand the test of stakeholders'
scrutiny. Presently, under Indian law, the nomination and
remuneration committee (a committee of the board comprising
of a majority of independent directors) is required to frame a
policy on remuneration of key employees. Also, the annual
remuneration paid to key executives is required to be made
public. Is this enough? To retain and nurture a trustworthy
relationship between the shareholders and the executive,
companies may consider framing remuneration policies which
are transparent and require shareholders' approval.

Founders' Control and Succession
Planning
 In India, founders' ability to control the affairs of the company
has the potential of derailing the entire corporate governance
system. Unlike developed economies, in India, identity of the
founder and the company is often merged.The founders,
irrespective of their legal position, continue to exercise
significant influence over the key business decisions of
companies and fail to acknowledge the need for succession
planning. From a governance and business continuity
perspective, it is best if founders chalk out a succession plan
and implement it. Family owned Indian companies suffer an
inherent inhibition to let go of control.The best way to tackle
with this is widen the shareholder base - as PE and other
institutional investors pump in capital, founders are forced to
think about a succession plan and step away with dignity.

Risk Management
 Today, large businesses are exposed to real-time monitoring
by business media and national media houses. Given that the
board is only playing an oversight role on the affairs of a
company, framing and implementing a risk management
policy is necessary. In this context, Indian company law
requires the board to include a statement in its report to the
shareholders indicating development and implementation of
risk management policy for the company.The independent
directors are mandated to assess the risk management
systems of the company. For a governance model to be
effective, a robust risk management policy which spells out
key guiding principles and practices for mitigating risks in
day-to-day activities is imperative.

Privacy and Data Protection
 As a key aspect of risk management, privacy and data
protection is an important governance issue. In this era
of digitalisation, a sound understanding of the
fundamentals of cyber security must be expected from
every director. Good governance will be only achieved
if executives are able to engage and understand the
specialists in their firm.The board must assess the
potential risk of handling data and take steps to ensure
such data is protected from potential misuse.The board
must invest a reasonable amount of time and money in
order ensure the goal of data protection is achieved.

Board's Approach to Corporate Social
Responsibility (CSR)
 India is one of the few countries which has legislated on CSR.
Companies meeting specified thresholds are required to constitute a
CSR committee from within the board.This committee then frames a
CSR policy and recommends spending on CSR activities based on
such policy. Companies are required to spend at least 2% of the
average net profits of last three financial years. For companies who fail
to meet the CSR spend, the boards of such companies are required to
disclose reasons for such failure in the board's report. During the last
year, companies which failed to comply received notices from the
ministry of corporate affairs asking for reasons why they did not incur
CSR spend and in some cases questioning the reasons disclosed for
not spending. In these circumstances, increased effort and seriousness
by the board towards CSR is necessary. CSR projects should be
managed by board with as much interest and vigour as any other
business project of the company.

Theories of corporate governance

Corporate Governance basics for management.pptx

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