Unit 3 corporate

governance
1.Meaning of corporate governance
• Corporate governance is the system of rules,
practices and processes by which a company is
directed and controlled. Corporate governance
essentially involves balancing the interests of a
company's many stakeholders
2. Importance
• Changing Ownership Structure : In recent years, the
ownership structure of companies has changed a lot.
Public financial institutions, mutual funds, etc. are
the single largest shareholder in most of the large
companies. So, they have effective control on the
management of the companies. They force the
management to use corporate governance. That is,
they put pressure on the management to become
more efficient, transparent, accountable, etc. The also
ask the management to make consumer-friendly
policies, to protect all social groups and to protect the
environment. So, the changing ownership structure
has resulted in corporate governance.
• Importance of Social Responsibility : Today, social
responsibility is given a lot of importance. The Board
 of Directors have to protect the rights of the
customers, employees, shareholders, suppliers, local
communities, etc. This is possible only if they use
corporate governance.
• Growing Number of Scams : In recent years, many
scams, frauds and corrupt practices have taken place.
Misuse and misappropriation of public money are
happening everyday in India and worldwide. It is
happening in the stock market, banks, financial
institutions, companies and government offices. In
order to avoid these scams and financial
irregularities, many companies have started corporate
governance.
• Indifference on the part of Shareholders : In general,
shareholders are inactive in the management of their
companies. They only attend the Annual general
meeting. Postal ballot is still absent in India. Proxies
are not allowed to speak in the meetings.
Shareholders associations are not strong. Therefore,
directors misuse their power for their own benefits.
So, there is a need for corporate governance to
protect all the stakeholders of the company.
• Globalisation : Today most big companies are selling
their goods in the global market. So, they have to
attract foreign investor and foreign customers. They
also have to follow foreign rules and regulations. All
this requires corporate governance. Without
 Corporate governance, it is impossible to enter,
survive and succeed the global market.
• Takeovers and Mergers : Today, there are many
takeovers and mergers in the business world.
Corporate governance is required to protect the
interest of all the parties during takeovers and
mergers.
• SEBI : SEBI has made corporate governance
compulsory for certain companies. This is done to
protect the interest of the investors and other
stakeholders.
3.Features of business ethics
Transparency : This means that the Board of
Directors must release all relevant information to the
stakeholders. They must show all the necessary
financial and operational data to the stakeholders.
They must not hide any important information or
maintain any secrecy.
Protection of Shareholders' Rights : The Board of
Directors must protect the rights of the stakeholders.
They must protect all the stakeholders, especially the
minority stakeholders.
More Powers to CEO : The CEO must be given more
powers so that he can approve the companies plans
and strategies independently.
Accountability : The CEO and the Board of Directors
must be made accountable for their actions to the
stakeholders and to the entire society.
Based on Ethics : Corporate governance is based on
ethics, moral principles and values. So, the Board of
directors must avoid unfair practices, cheating,
exploitation, etc.
Universal Application : Corporate governance has
universal application. That is, it is used by companies
all over the world. It is given a legal recognition in
many countries. All companies must use corporate
governance voluntarily.
Systematic : Corporate governance is very
systematic. It is based on laws, procedures, practices,
rules, etc. All these laws are made to increase the
wealth of the shareholders and to protect the rights of
all the stakeholders of the company.
4.What is a 'Board Of Directors - B
Of D'
A board of directors (B of D) is a group of
individuals that are elected as, or elected to act as,
representatives of the stockholders to establish
corporate management related policies and to make
decisions on major company issues. Every public
company must have a board of directors. Some
private and nonprofit companies have a board of
directors as well.
5.Typical Board Positions
A typical board of directors has at least five
positions, although the minimum number required is
three -- a chair, secretary and treasurer -- according to
the Small Business Association. These include the
board chair or president, the vice-chair or vice-
president, the secretary, the treasurer and the board
members. In some cases, positions may be combined,
such as the secretary and treasurer. Some boards may
also include positions such as committee chairs,
according to The Bridgespan Group. The executive
director of an organization may also attend board
meetings but is generally not considered a voting
member.

Board Chair
The board chair is the leader of the board of directors,
sets policy and is the person to whom the CEO is
accountable, according to The Bridgespan Group. In
non-profit organizations, the board chair usually
takes a lead role in fund-raising activities, evaluates
the effectiveness of the CEO and individual board
members, evaluates the effectiveness of the
organization and guides the board in matters of
organizational priorities and governance. The chair
develops agendas for board meetings -- usually in
collaboration with the CEO, chairs the meetings and
may also attend committee meetings. The vice-chair
assists in these activities, takes the place of the chair
if she must be absent from a meeting or function and
may have other responsibilities as well.

Secretary
A board secretary maintains all records related to the
board and board meetings. In some cases, the
secretary actually takes and transcribes minutes,
while in others, the secretary supervises the activities
of members of the organization’s clerical staff. The
board secretary may also be responsible for managing
organization records. The secretary ensures board
members have copies of each meeting's minutes and
provides members with materials for review prior to
a meeting. Board secretaries must also be familiar
with legal documents such as the board bylaws and
other material that may be relevant to board
meetings.

Treasurer
The board treasurer is the board's financial expert.
She manages the fiscal matters and finances of the
organization. A board treasurer may have the
responsibility for developing and monitoring the
annual budget or may supervise the activities of staff
who perform these tasks. The treasurer typically
presents the budget to the board for its approval and
 ensures the financial policies and procedures are
developed, updated and approved by the board. If this
position is combined with that of the secretary, the
treasurer will also perform the board secretary’s
functions.

Board Members
Board members are typically chosen for skills and
experience the board feels are necessary. Non-profit
boards, for example, may actively seek out board
members with fund-raising experience. People with
legal, financial or community expertise may also be
invited to serve on a board. Board members make up
the board committees, participate in the board's
annual planning and evaluation process and
participate in discussions and decisions related to the
organization's governance. One of the key
responsibilities of a board member is to develop
collegial working relationships with other board
members to help build consensus in the decision-
making process.
6.roles of the board of
directors
The roles of the board of directors include :-
Establish vision, mission and values
  Determine the company's vision and mission to
guide and set the pace for its current operations
and future development.
 Determine the values to be promoted throughout
the company.
 Determine and review company goals.
 Determine company policies
Brefi Group facilitates corporate retreats to help
boards review strategy or develop vision, mission
and values statements.
Set strategy and structure
 Review and evaluate present and future
opportunities, threats and risks in the external
environment and current and future strengths,
weaknesses and risks relating to the company.
 Determine strategic options, select those to be
pursued, and decide the means to implement
and support them.
 Determine the business strategies and
plans that underpin the corporate strategy.
 Ensure that the company's organisational
structure and capability are appropriate for
implementing the chosen strategies.
Brefi Group's free e-course includes modules to help
you set strategy:
  PEST and SWOT analyses
 Determining strategic options
 Strategies and plans
Delegate to management
 Delegate authority to management, and monitor
and evaluate the implementation of policies,
strategies and business plans.
 Determine monitoring criteria to be used by the
board.
 Ensure that internal controls are effective.
 Communicate with senior management.
Brefi Group's free e-course includes a module
on delegation to management. You could subscribe
to the e-course, or access the module here.
Exercise accountability to shareholders and be
responsible to relevant stakeholders
 Ensure that communications both to and from
shareholders and relevant stakeholders are
effective.
 Understand and take into account the interests
of shareholders and relevant stakeholders.
 Monitor relations with shareholders and relevant
stakeholders by gathering and evaluation of
appropriate information.
  Promote the goodwill and support of
shareholders and relevant stakeholders.

7.Responsibilities of directors
Directors look after the affairs of the company,
and are in a position of trust. They might abuse
their position in order to profit at the expense of
their company, and, therefore, at the expense of
the shareholders of the company.
Consequently, the law imposes a number of
duties, burdens and responsibilities upon
directors, to prevent abuse. Much of company
law can be seen as a balance between allowing
directors to manage the company's business so
as to make a profit, and preventing them from
abusing this freedom.
Directors are responsible for ensuring that
proper books of account are kept.
In some circumstances, a director can be
required to help pay the debts of his company,
even though it is a separate legal person. For
example, directors of a company who try to
'trade out of difficulty' and fail may be found
guilty of 'wrongful trading' and can be made
personally liable. Directors are particularly
vulnerable if they have acted in a way which
benefits themselves.
 The directors must always exercise their
powers for a 'proper purpose' – that is, in
furtherance of the reason for which they
were given those powers by the
shareholders.
 Directors must act in good faith in what they
honestly believe to be the best interests of
the company, and not for any collateral
purpose. This means that, particularly in the
event of a conflict of interest between the
company's interests and their own, the
directors must always favour the company.
 Directors must act with due skill and care.
 Directors must consider the interests of
employees of the company.

8. The executive director

An executive director holds a position on the
executive board. They have “executive
responsibility” for running the company’s
business. They will typically be elected by
employees and shareholders and might be an
employee, officer or stakeholder in the company.
Other directors may be representatives of, for
example, an institutional investor or a union.

They don’t gain remuneration for their role on the

board, although the UK Corporate Governance
suggests that “a significant proportion” of their
remuneration should be “structured so as to link
rewards to corporate and individual performance”.

There is nothing to stop an executive director of one

board becoming a non-executive director on another
company’s board. Currently around 30% of
executive directors have non-exec roles
elsewhere.
 

9.The non-executive director

The demand for non-executive directors has
increased in recent years. Non-executive directors
tend to be cherry picked for their personal qualities,
experience and specialist knowledge. Good non-
executive appointments can create positive PR, and
help the organisation generate long-term exposure
in the right areas.

Their role is broad. Primarily they will provide

objective criticism on board matters –
“constructive challenge” – and facilitate strategic
decisions by the executive directors. Since they
monitor the executive management, it is vital they
are impartial and not influenced by other
associations, shareholdings or directorships.
Therefore they must be Independent of other
stakeholders or interested parties. However, in all
activities, they must act in the interests of those who
have an interest in the company, such as
employees, clients, shareholders and society in
general.

Non-executive directors also have a mentoring

role to advise and guide Chairmen and Chief
Executives where issues arise, or prior to them
being brought up in board meetings. They are
the ‘critical friend’ of the CEO and executive team,
with 50% of their role asking questions on how the
business is run in the best interests of its
stakeholders, while spending 50% of the time
supporting the team towards mission success and
growth. They can also sit on sub committees to
ensure the company benefits most from their skill
sets.

The non-executive directors will also be reimbursed

and get additional pay for attending meetings, with
an upward trend in their remuneration now
beginning to plateau.

According to PwC’s report “Non-executive director

fees 2104”, the base fee for a non-executive director
in a FTSE 100 company is £65,000 dropping to
£48,000 in a FTSE 250 and £40,000 at an SMC.
Additional fees are paid for representation on audit,
remuneration and nomination committees of
between £4000 and £13000 per committee.

10.clause 49