WHAT IS CORPORATE

GOVERNANCE?
“ Corporate”
 Corporate is adjective meaning “of or relating to a
corporation” derived from the noun corporation.
 A corporation is an organization created (incorporated) by a
group of shareholders who have ownership of the corporation.
 The elected Board of directors appoint and oversee
management of the corporation.
 “Governance”

 Oxford English Dictionary defines “Governance” as the

act, manner, fact or function of governing, monitoring, control.
 The word has Latin origins that suggest the notion of
'steering'. It deals with the processes and systems by which an
organization or society operates.
 “ Corporate
Governance”

 It is a broad concept and has been defined and understood

differently by different groups and at different points of time.
 The Cadbury Committee report defines it as “the system by
which companies are directed and controlled”.
 It is generally understood as the framework of rules,
relationships, systems and processes within and by which
authority is exercised and controlled in corporations.”
 Corporate Governance
• Corporate Governance is not just corporate management; it is
something much broader to include a fair efficient and
transparent administration to meet certain well defined
objectives.

• It is a system of structuring, operating and controlling a

company with a view to achieve long term strategic goals to
satisfy shareholders, creditors employees customers and
suppliers, and comply with the legal and regulatory
requirements, apart from meeting environmental and local
community needs.

• When it is practiced under a well laid out system, it leads to

building of a legal, commercial and institutional framework and
democrats the boundaries within which these functions are
performed.
Governance

Governance can be used with reference to all kind of

organisational structure e.g.

1. NGO- not for profit organisation

2. Municipal corporation/ Gram panchyat

3. Central/ State Government

4. Partnership firm
Framework of Governance
1. Supervisory Board/ Committee/ Team
2. Audit Committee
3. Internal Audit
4. Statutory Audit
5. Disclosure of information
6. Risk management framework
7. Internal Control framework
Corporate Governance & Corporate
Management
CORPORATE CORPORATE
GOVERNANCE MANAGEMENT
Governance External Focus Internal Focus

Governance Management
assumes an open assumes a closed
system system

Management Strategy- oriented Task-oriented

Concerned with Concerned with

where the company getting the
is going company there
 History of Corporate Governance
 Kautilya’s(Chanakya) Arthashastra is the oldest book (around 300 B.C) on Management
available to the world
 This masterpiece covered a wide range of topics and also recommended that
 the king shall not consult with any advisor who had a vested interest in the outcome
of a particular project.
 establishment of an ethical code of conduct—a topic which has received a great deal
of attention now during the past few years after corporate scandals 
 the codification of accounting rules into one uniform system to prevent problems in
translating financial data between disparate methods of accounting – a subject which 
the international accounting community is dealing with in terms of the convergence
of accounting standards.
 In the western world The East India Company introduced a Court of Directors,
separating ownership and control (U.K., the Netherlands) in 1600s
 International scenario
Year Name of Committee/Body Areas/Aspects Covered
1992 Sir Adrian Cadbury Committee, Financial Aspects of Corporate Governance
UK
1994 Mervyn E . King’s Committee , Corporate Governance
South Africa
1995 Greenbury Committee , UK Directors’ Remuneration
1998 Hampel Committee, UK Combine Code of Best Practices
1999 Blue Ribbon Committee, US Improving the Effectiveness of Corporate Audit
Committees
1999 OECD, The Organisation for Principles of Corporate Governance
Economic Co-operation and
Development (OECD; 
1999 CACG, Search Results Principles for Corporate Governance in
Featured snippet from the web Commonwealth
The Commonwealth Association
for Corporate Governance
(CACG)
2003 Derek Higgs Committee, UK Review of role of effectiveness of Non-executive
Directors
2003 ASX Corporate Governance Principles of Good Corporate Governance and Best
Council, Australia Practice Recommendations
 Indian scenario
Year Name of Areas/Aspects Covered
Committee/Body

1998 Confederation of Desirable Corporate Governance – A Code

Indian Industry (CII)

1999 Kumar Mangalam Corporate Governance

Birla Committee

2002 Naresh Chandra Corporate Audit & Governance

Committee

2003 N. R. Narayana Corporate Governance

Murthy Committee
 Objectives of good corporate
governance
1. Strengthen management oversight functions and accountability
2. Balance skills, experience and independence on the board
appropriate to the nature and extent of company operations
3. Establish a code to ensure integrity
4. Safeguard the integrity of company reporting
5. Risk management and internal control
6. Disclosure of all relevant and material matters
7. Recognition and preservation of needs of shareholders
Governance Concept in
‘Ramayana

 To provide “the maximum happiness for

the maximum number of people for the
maximum period, based on the
principles of Dharma – righteousness
and moral values.”
Corporate Governance
What is Governance?
 Corporate Governance is the 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”.

- The Institute of Company Secretaries of India

Definition
Corporate Governance Is The Set Of Processes,
customs, policies, Laws And Institutions Affecting
The Way A Company Is Directed, administered Or
Controlled.
Purpose of corporate governance is to have a
demonstrable IMPACT on a corporation’s
FINANCIAL PERFORMANCE.
Driving Forces of CG in India

1) Unethical Business Practices

 Security Scams ---Harshad Mehtha Security

Scam
 Equity allotments at discount rates to the
controlling groups
 Disappearance of Companies (1993-94) -
around 4,000
 companies with 25,000 crores without starting
business
 Misdeed of Companies

 Plantation, Sheep rearing, etc.

2) Impact of Globalization
 Integration with Foreign Market
 Foreign Investors expectations
 New Business Opportunities --- IT & ITES,
 Information Technology Enabled Services BPO ,
Business Process Outsourcing etc.,
 New Capital formation – FII, FDI

3) Impact of Privatisation
 New structure of ownership
 Multinational Companies
 Corporate Governance
 Contemporary corporate governance started in
1992 with the Cadbury report in the UK
 Cadbury was the result of several high profile

company collapses
 is concerned primarily with protecting weak and

widely dispersed shareholders against self-

interested Directors and managers
 Parties to corporate governance
1. Board of directors
2. Managers
3. Workers
4. Shareholders or owners
5. Regulators
6. Customers
7. Suppliers
8. Community (people affected by the actions of the
organization)
IT IS THE TRANSPERANCY BETWEEN
PRINCIPAL PLAYERS OF CORPORATE GOVERNACE

Board of Directors
Management

Employees
Customers

Shareholders
Banks & Lenders

Audit Committee
Environment & Community
Regulators
Corporate Governance
 Primarily concerned with public listed companies i.e.
those listed on a Stock Exchange

 Focused on preventing corporate collapses such as

Enron, Polly Peck and the Maxwell companies
PRINCIPLES
 The Right And Equitable Treatment Of
Shareholders.
 Interests Of Other Stakeholders.
 Role And Responsibilities Of The Board Of
Directors.
 Organisational Integrity And Ethical Behaviour.
 Business Operations Disclosures And
Tranceparency Of Results.
Four Pillars
of Corporate Governance
 Accountability

 Fairness

 Transparency

 Independence
Accountability
 Ensure that management is accountable to the
Board

 Ensure that the Board is accountable to

shareholders
Fairness
 Protect Shareholders rights

 Treat all shareholders including minorities, equitably

 Provide effective redress for violations

Transparency

Ensure timely, accurate disclosure on all material

matters, including the financial situation,
performance, ownership and corporate governance
Independence
 Procedures and structures are in place so as to
minimise, or avoid completely conflicts of interest

 Independent Directors and Advisers i.e. free from the

influence of others
Corporate Governance in Africa
 In 1994, The King Report in South Africa also
included within its Code of Corporate Governance
requirements on sustainability and ethical standards

 This was due to the context of a developing country

and business ethics in Africa
Sustainability

‘development that meets the needs

of the present without compromising
the ability of future generations
to meet their own needs’
Stakeholders
 Sustainability recognizes stakeholder rights i.e. the
rights of interested parties e.g. employees, the
community, suppliers, customers etc.

 Encourage co-operation between the company and its

stakeholders in creating wealth, jobs and economic
stability
Business Ethics
 Established values and principles a company uses to
inform and conduct its activities

 Should permeate a company’s culture and drive its

strategy, business goals, policies and activities

 Usually found in a code of ethics

Elements of Corporate Governance
 Good Board practices

 Control Environment

 Transparent disclosure

 Well-defined shareholder rights

 Board commitment
Good Board Practices
 Clearly defined roles and authorities

 Duties and responsibilities of Directors understood

 Board is well structured

 Appropriate composition and mix of skills

Good Board procedures
 Appropriate Board procedures

 Director Remuneration in line with best practice

 Board self-evaluation and training conducted

Control Environment
 Internal control procedures

 Risk management framework present

 Disaster recovery systems in place

 Media management techniques in use

Control Environment
 Business continuity procedures in place

 Independent external auditor conducts audits

 Independent audit committee established

Control Environment
 Internal Audit Function

 Management Information systems established

 Compliance Function established

Transparent Disclosure
 Financial Information disclosed

 Non-Financial Information disclosed

 Financials prepared according to International

Financial Reporting Standards (IFRS)
Transparent Disclosure
 Companies Registry filings up to date

 High-Quality annual report published

 Web-based disclosure
Well-Defined Shareholder Rights
 Minority shareholder rights formalised

 Well-organised shareholder meetings conducted

 Policy on related party transactions

Well-Defined Shareholder Rights
 Policy on extraordinary transactions

 Clearly defined and explicit dividend policy

Board Commitment
 The Board discusses corporate governance issues and
has created a corporate governance committee

 A corporate governance improvement plan has been

created

 Appropriate resources are committed to corporate

governance initiatives
Board Commitment
 Policies and procedures have been formalised and
distributed to relevant staff
 A corporate governance code has been developed
 A code of ethics has been developed
 The company is recognised as a corporate
governance leader
Other Entities
 Corporate Governance applies to all types of
organisations not just companies in the private sector
but also in the not for profit and public sectors

 Examples are NGOs, schools, hospitals, pension

funds, state-owned enterprises
Why Corporate Governance?
 Better access to external finance
 Lower costs of capital – interest rates on loans
 Improved company performance – sustainability
 Higher firm valuation and share performance
 Reduced risk of corporate crisis and scandals