Corporate governance & sustainable development
- 1. Corporate Governance and Sustainability By Dr. Zaibun Nisa, Guest Faculty Department of Commerce, KMCUAFU, Lucknow.
- 2. CORPORATE GOVERNANCE Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.
- 3. BENEFITS OF CORPORATE GOVERNANCE Good corporate governance ensures corporate success and economic growth. Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively. It lowers the capital cost. There is a positive impact on the share price. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. Good corporate governance also minimizes wastages, corruption, risks and mismanagement. It helps in brand formation and development. It ensures organization in managed in a manner that fits the best interests of all.
- 4. THEORIES OF CORPORATE GOVERNANCE There are many theories of corporate governance which addressed the challenges of governance of firms and companies from time to time. The Corporate Governance is the process of decision making and the process by which decisions are implemented in large businesses is known as Corporate Governance. ▪ Agency Theory ▪ Stewardship Theory ▪ Resource Dependency Theory ▪ Stakeholder Theory ▪ Transaction Cost Theory ▪ Political Theory
- 5. Models of Corporate Governance Canadian Model Canada has a history of French and British colonisation. The industries inherited those cultures. The cultural background in these industries affected subsequent developments. The country has large influence of French merchantism. Anglo-American Model
- 8. Indian Model: ▪ East India Co. (EIC) in its trade had malpractices. ▪ Current practice since 400 years since industrialisation in companies. ▪ Environmental and world commercial are classic cases. ▪ Family owned cos. ▪ India has long history of commercial activities 2500 years old. ▪ (a) The Managing Agency system 1850-1955 ▪ (b) The Promoter System 1956-1991 ▪ (c) The Anglo American System 1992 onwards
- 9. GLOBAL CORPORATE GOVERNANCE Globally, there is an increased realization and an acceptability that good corporate governance is a means to create a business environment of trust, transparency and accountability in order to support investment, financial stability and sustainable economic growth. The latest principles encourage the prominant role of independent Board members. It states that, it is a good practice where remuneration policy and contracts for Board members and key executives is handled by a special committee of the Board comprising either wholly or a majority of Independent Directors. Although, there is no specific law to enforce number of women directors on the Board, following countries have taken steps to maintain the ratio of female Board representation The latest G20/ OECD principles encourages measures such as voluntary targets, disclosure requirements, Boardroom quotas, and private initiatives that enhance gender diversity on Boards and in senior management.
- 10. principles on corporate governance recommends that Boards should regularly carry out evaluations to appraise their performance and assess whether they possess the right mix of background and competences. • Corporate governance code for most of the countries in Europe (Italy, France, Germany), UK, APAC (China, Japan, India) state requirements of Board oversight on IFC, risk management, related party transactions and other disclosures in their annual report. the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. It says, that disclosure should include, but not be limited to, material information on: 1. The financial and operating results of the company. 2. Company objectives and non- financial information. 3. Major share ownership, including beneficial owners, and voting rights. 4. Remuneration of members of the Board and key executives 5. Information about Board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the Board 6. Related Party Transactions 7. Foreseeable risk factors 8. Issues regarding employees and other stakeholders. 9. Governance structures and policies, including the content of any corporate governance code or policy and the process by which it is implemented
- 11. EMERGING ISSUES IN CORPORATE GOVERNANCE Greater attention towards director independence Shareholder democracy vs stakeholder democracy Better Boards and diversity Risk governance and risk management Compensation governance Increased shareholder accountability Increased focus on strategy and value creation Information Technology governance Board performance evaluations
- 12. MAJOR CORPORATE SCAMS IN INDIA 1. Hawala Scandal- 1990-1991, 100 Crore It was bribery and political scandal in tune to $18 million Can to public 1996 Accused occupied important seats in parliament. Prime accused were Jain Brothers- Hawala brokers known for paying bribes to political leaders. After the case it was mandated for the government to set up independent central vigilance commission (CVC) which acts as watchdog. 2. Harshad Mehta Scam, 1992, 5000 Crore Harshad Mehta was young and intelligent stock broker. Well aware about the loopholes and lapses in stock market. Manipulated stock market by using worthless bank receipts The courts brought 27 charges against him but convicted for only 4. Many legislatures brought in to amendments to SEBI.
- 13. ………….Corporate Scams 3. Ketan Parekh Scam, 1991-2000 Ketan Parekh was known as ‘pied Piper of Dalal Street’ Another huge setback to stock exchange in 1990s He was stock broker and chartered accountant He bought trading shares when they are trading low, as soon as their prices rise he secure funds from Banks pledging these shares As soon as prices began to tumble, he had to sell pledged share to repay loans which led to wiping 2000 billion from stock market The court had mandated disclosure and greater transparency in Indian financial system. 4. Adarsh Housing Society Scam, 2010 It revealed the corruption in the Army as well as bureaucracy. It was 31 storey building constructed for the Kargil war heroes and war widows in Colaba, Mumbai in 2011. However, allotment were made to bureaucrats, officials, and prominent politicians and ther relatives. Besides illegal allotments plan of building also changed from 6 to 31 storeys. Investigation still going on in Bombay High Court.
- 14. Corporate Scams 2G Spectrum scam ▪ the government, in 2008, had undercharged mobile telephone companies for frequency allocation licences. ▪ In February 2012, the Supreme Court of India declared the allotment of spectrum as “unconstitutional and arbitrary” and cancelled the 122 licences issued in 2008 under A. Raja, then Minister of Communications and IT.
- 15. BOARD OF DIRECTORS The individuals at the highest level of management are responsible for the functioning of the company. ▪ They are responsible for taking all the big decisions and making policy changes. Composition ▪ Section 149 of the Companies Act states that every company’s board of directors must necessarily have a minimum of three directors if it is a public company. two directors if it is a private company and one director in a one person company. ▪ The maximum number of members a company can assign as directors is fifteen. However, the company can pass a special resolution in a general meeting to allow for assigning more than fifteen members to the board of directors. ▪ The maximum number of companies that an individual can become a director of, is 20 companies. ▪ At least one director, who has lived in India for a minimum of 182 calendar days of the previous year, shall be appointed by every company’s board. ▪ All listed companies must have at least one-third proportion of their board of directors as independent directors.
- 16. COMMITTEES UNDER THE BOARD OF DIRECTORS 1. Audit Committee should have a minimum of 3 members. A total of two-thirds of the committee comprises of independent directors At least one member should have expertise in the field of account and finance and all audit members must be well in finance. An independent director will be the chairman of the audit committee 2. Nomination and Remuneration Committee. The committee shall comprise of at least three directors. All members must be non-executive directors. At least 50% of the directors shall be non-executive members. Director of the committee will be an independent director.
- 17. 3. Stakeholders Relationship Committee takes care of all issues related to problems such as grievances of shareholders, debenture holders and other parties of importance. committee looks into such matters and resolve issues while maintaining a good relationship with shareholders and other parties. the chairman of this committee has to be a non-executive member director from among the board of directors. Risk management Committee The members of the board will form the risk management committee. A major portion of the Risk Management Committee shall consist of members of the board. The chairman of the Risk Management Committee shall be a member of the board.
- 18. Audit Committee: Role & Responsibilities primary purpose is to provide oversight of the financial reporting process, the audit process, the company’s system of internal controls and compliance with laws and regulations. audit committee is responsible for the appointment, compensation and oversight of the work of the auditor. committee also reviews proposed audit approaches and handle coordination of the audit effort with internal audit staff. Regulation: Effective April 2003 the Securities and Exchange Commission (SEC) The independence of audit committee members; the audit committee's responsibility to select and oversee the issuer's independent accountant; Procedures for handling complaints regarding the issuer's accounting practices; The authority of the audit committee to engage advisors; Funding for the independent auditor and any outside advisors engaged by the audit committee.
- 19. RISK MANAGEMENT COMMITTEE: Role & Responsibilities Risk Management Process
- 20. ROLES: To assess the Company’s risk profile and key areas of risk in particular. To recommend the Board and adoption of risk assessment and rating procedures. To articulate the Company’s policy for the oversight and management of business risks. To examine and determine the sufficiency of the Company’s internal processes for reporting on and managing key risk areas. To assess and recommend the Board acceptable levels of risk. To develop and implement a risk management framework and internal control system. To review the nature and level of insurance coverage. To have special investigations into areas of corporate risk and break-downs in internal control. To review management’s response to the Company’s auditors’ recommendations those are adopted. To report the trends on the Company’s risk profile, reports on specific risks and the status of the risk management process.
- 21. RESPONSIBILITY: To define the risk appetite of the organization. To exercise oversight of management’s responsibilities, and review the risk profile of the organization to ensure that risk is not higher than the risk appetite determined by the board. To ensure that the Company is taking appropriate measures to achieve prudent balance between risk and reward in both ongoing and new business activities. To assist the Board in setting risk strategies, policies, frameworks, models and procedures in liaison with management and in the discharge of its duties relating to corporate accountability and associated risk in terms of management assurance and reporting. To review and assess the quality, integrity and effectiveness of the risk management systems and ensure that the risk policies and strategies are effectively managed. To review and assess the nature, role, responsibility and authority of the risk management function within the Company and outline the scope of risk management work. To ensure that the Company has implemented an effective ongoing process to identify risk, to measure its potential impact against a broad set of assumptions and then to activate what is necessary to pro-actively manage these risks, and to decide the Company’s appetite or tolerance for risk.
- 22. Board Leadership: The Split CEO/Chairman Structure Debate the regulatory framework can dictate the board leadership structure, investor expectations play an important role. where investors can apply pressure through voting practices, separation of the chairman and CEO roles may be more common. Trends in Board Leadership independent chairman ranked third in the type of proposals put forth this proxy season, with 1% of all proposals relating to chairman independence for independent chair proposals, there were 48 vote results available with an average rate of support of 35.6%. With regard to shareholder proposals dealing with board issues and takeover defenses, the “independent board chairman” category had the highest number of results available
- 23. In evaluating the optimal board leadership structure, companies should consider the following in addition to local regulatory requirements or guidelines: If the company decides to split the roles of chair and CEO between two individuals, the company will need to make the determination of either having a non-executive chair or an independent chair. Establishing a second-in-command for the board through the appointment of a lead, presiding or senior independent director or a deputy or vice chair of the board. Appointing the lead, presiding, or senior independent director or the deputy or vice chair to chair the nominating and governance committee or the compensation committee, or both committees concurrently. create a separation of powers and checks and balances as a safeguard against conflicts of interests that may arise due to the board chair’s and committee chairs’ authorities and responsibilities. Defining the board chair’s responsibilities and qualifications, both of which should be used in recruiting and evaluating the board chair.
- 24. Rights and Duties of Shareholders of a Company In India, companies are mostly established and governed by Companies Act 2013. There are basically two types of companies established in India, namely public limited company and private limited company. A shareholder, commonly referred to as a stockholder, is any person, company, or institution that owns at least one share of a company’s stock. Shareholders play an important role in the framing and profits of the company. There are two types of shareholders: ▪ Equity Shareholders: main stakeholders in a company and when the time of dividend distribution comes the preference shareholders would get the first. ▪ Preference shareholders : generally have no voting rights because of their preferred status. They receive fixed dividends, generally larger than those paid to common stockholders, and their dividends are paid before common shareholders.
- 26. SHAREHOLDERS’ RIGHTS Appointment of directors ▪ An ordinary resolution is required to be passed by the shareholders for the appointment. ▪ An additional director who will hold the office until the next general body meeting; ▪ An alternate director who will act as an alternate director for a period of 3 months; ▪ A nominee director; ▪ Director appointed in the case of a casual vacancy in the office of any director appointed in a general meeting in a public company. Legal action against directors ▪ Any act done by the director in any manner which is prejudicial against the affairs of the company. ▪ Any act done which is beyond the law or against the constitution. ▪ Fraud. ▪ When the assets of the company are being transferred at an undervalued rate. ▪ When there is a diversion of funds of the company. ▪ Any act done in a mala fide manner.
- 27. Appointment of company auditors Under Companies Act 2013, the first auditor of the company is to be appointed by the board of directors. Further the shareholders at the annual general body meeting at the recommendation of directors and audit committee. Voting rights Shareholders also have the right to attend and vote at the annual general body meeting. Companies Act 2013 recognizes following types of voting: ▪ Voting by the showing of hands ▪ Voting done by polling ▪ Voting done by electronic means ▪ Voting by means of postal ballot
- 28. Right to call for general meetings Right to inspect registers and books Right to get copies of financial statements Winding up of the company Other Shareholders’ Rights When the sale of any material of any company is done then the shareholders should get the amount which they are entitled to receive; When a company is converted into another company then it requires prior approval of shareholders. Also, all the appointment has to be done according to all the procedures and also auditors and directors have to be done; Right to approach the court in case of insolvency.
- 29. MINORITY SHAREHOLDERS Minority shareholders are given 10% of shars or minimum hundred shareholders (whichever is less) and 1/3rd of the total number of members without sharecapital. By definition Minority shareholders are those who does not enjoy voting power, have below 50% of ownership of the firm’s capital. RIGHTS 1. Oppression & Mismanagement: Sec 397 of companies act describes matters oppressive to any members and sec 398 describes the affairs prejudicial to public interest or interest of company. ▪ Shareholder’s of any number ( central government) or 10% shareholding or 100 members or 1/5th members can apply for relief. 2. Reconstruction & Amalgamation: ▪ For transfer of share 90% shareholders’ consent is required. ▪ Shares need to acquire to price determined on the basis of valuation by registered valuer in accordance with rules & regulations.
- 30. 3. Minority Upgraded: Sec 151, listed companies required to appoint director elected by small shareholders ( holding shares of nominal value less than 20000 ₹). Small shareholders’ director not retire by rotation; they shall enjoy tenure of 3 years. 4. E-Voting: Mandatory for listed companies with least 1000 shareholders. DIFFERENTIAL VOTING RIGHTS ( Sec 43 (a)(ii) Companies Act 2013) DVR refers to equity shareholders having differential rights as to dividend and/or voting. To have more investors while retaining control over company,
- 31. INSTITUTIONAL ACTIVISM ▪ Institutions voice at AGM specially to execute pay And for directors appointment. ▪ Earlier AGMs were dominated by the management but now funds are voting on matters on financial remuneration proposals. ▪ Shareholders’ participation were previously limited to blue-chip companies. Now shareholders have started questioning about management on companies utilisation & remuneration & proposed resolution. STEWARDSHIP CODE: ▪ Are the guidelines for insurers holding voting rights insurers holding voting rights. ▪ It aimed at improving corporate governance.
- 32. CLASS ACTION SUIT ▪ It is a class suit or representative action is a law suit in which large group of people collectively bring a claim to court. ▪ Sec 245 & 246: allows large number of people with common interest in matter can sue or be sued. ▪ Advantages: ▪ Economies of aggregation ▪ Avoid litigation by avoiding multiple suits ➢ FOREIGN INSTITUTIONAL INVESTORS It is an institution establish or incorporated outside India, proposed to make investment in India. Registered as FII in accordance with sec 2 (f) of SEBI regulation 1995. They are allowed to subscribe to new securities or trade in already issued securities.
- 33. Proxy Advisory Services Is a type of market intermediary that provides services to the shareholders of listed companies or quoted companies. Services are provided by these firms in relation to activities performed by shareholders. These are independent research organisations responsible to evaluate advantages and disadvantages of corporate actions i.e. mergers, acquisitions, CEO pay, which shareholders are expected to vote in AGM, extra ordinary general meeting. Main function of these firms are to analyse the corporate actions that are put to vote, give shareholders detailed well researched reports. These services are used by mainly foreign institutional investors. Indian Proxy Advisory Firms: IiAS ( Institutional investor advisory firms) Institutional investors: Mutual Funds, Insurers.
- 34. ADVANTAGES: Proxy Advisory Services Firms acts as watchdog over company for protection of interest of shareholders. Help in checking compliance,. Reduce operational cost. Help in airing concerns on behalf of investors. Also bring best practices,
- 35. SHAREHOLDERS’PROPOSAL It is a document recommendation that shareholder submit to company advocating the company to take specific course of action. This is essence of shareholders activism. It include clearly defined path to implementation, offer innovation. Anyone holding even single share in publicly trading company. As per US securities and exchange commission only major (not minor) are permitted to initiate it. Once proposal is submitted. Company add it to agenda for voting in next AGM. Contact information is on companies Proxy Statement. ( Generally 6 months before AGM)
- 36. CORPORATE SOCIAL RESPONSIBILITY Responsibility of a company towards the society. Companies Act 2013, Sec 135 Schedule VIII of Companies Act effective from 1st April 2014. It specifies manner in which CSR activities should be formulated, undertake, reported and monitored. Schedule VII, list activities undertaken shall not qualify for CSR. CSR is mandatory for companies fulfil the following conditions: Net Worth 500 Cr, Turnover 1000 Cr., Net Profit 5 Cr.; Shall spend at least 2% of their average 3 years of net profit on CSR activities. TYPES OF COMPANIES COME UNDER CSR ▪ Every company incorporated in India. ▪ Including holding or subsidiary ▪ Foreign company having branch office in India CSR funds can only be utilised in India.
- 37. SPENDING ELIGIBLE FOR CSR ▪ Swatchh Bharat Abhiyan ▪ Swatchh Ganga Abhiyan ▪ Eradicating poverty, malnutrition, promoting health care ▪ promoting education, employment, enhancing vocational skills ▪ Empowering women, setting up homes and hostels, old age homes. ▪ Animal welfare, agro forestry, conservation of natural resources ▪ Training to promote rural sports. ▪ Contributing to P.M. relief fund. ▪ Contribution to technology incubation.
- 38. CSR Models 1. Friedman Model (1962-73) ▪ Business should perform social as well as moral duty. ▪ To serve his shareholders & stockholders. 2. Ackerman Model (1976) ▪ Internal policy goals & their relation to CSR ▪ STAGES: ▪ Identify problem & take their project to solve some social problem. ▪ Intensive problem study by experts & getting suggestions. ▪ Managers take up project.
- 39. Carroll Model- 1991 Philanthropic Responsibility Ethical Responsibility Legal Responsibility Economic Responsibility
- 40. ….Carroll Model Economic responsibility: Be profitable, Do what is required by global capitalism. Legal Responsibility: Obey Law, Do what is required by global stakeholders. Ethical Responsibility: Be ethical, Do what is expected by global stakeholders. Philanthropic Responsibility: Be a good global corporate citizen, Do what is desired by global stakeholders.
- 41. STOCKHOLDERS & STAKEHOLDERS MODEL 1. Productivism: Mission is to maximise Profit. 2. Progressivism: Basically motivated by self interest and should have ability to transform society. 3. Philanthropy: Entertain stockholders’ CSR dominated by moral obligation and not by self interest. 4. ethical Idealism: Sharing corporate profit for human activities. Orientation Motives Self 1 Productivism 2 Progressivism Interest Moral 3 Philanthropy 4 Ethical Idealism Duty
- 42. NEW CSR MODEL BEST CSR PRACTICE ▪ Set Feasible, viable & measurable goals. ▪ Build long lasting relationship with community ▪ Retain community’s core values ▪ Impact of CSR need to be assessed ▪ Reporting impact ▪ Create community awareness Financial Capability Ethical Rooting Strong Poor Strong CSR (+) CSR (-) Poor CSR (-) CSR (-)
- 43. SUSTAINABLE DEVELOPMENT Definition: ‘For the business enterprise, sustainable development means adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future. ‘ Implications for business : Sustainable development is good business in itself. It creates opportunities for suppliers of ‘green consumers’, developers of environmentally safer materials and processes, firms that invest in eco-efficiency, and those that engage themselves in social well-being. These enterprises will generally have a competitive advantage. They will earn their local community’s goodwill and see their efforts reflected in the bottom line.
- 44. STEPS REQUIRED BY ENTERPRISE FOR SUSTAINABLE DEVELOPMENT: 1. Perform a stakeholder analysis: It sets out the issues, concerns and information needs of the stakeholders with respect to the organization’s sustainable development activities. 2. Set sustainable development policies and objectives :The next objective is to articulate the basic values that the enterprise expects its employees to follow with respect to sustainable development, and to set targets for operating performance. 3. Design and execute an implementation plan :Translating sustainable development policies into operational terms is a major undertaking that will affect the entire organization. It involves changing the corporate culture and employee attitudes, defining responsibilities and accountability, and establishing organizational structures, information reporting systems and operational practices. 4. Develop a supportive corporate culture : for sustainable development policies, an appropriate corporate culture is essential. In the process of implementing sustainable development or environmental management policies, many companies have experienced a kind of organizational renewal. The increased participation of employees not only generates practical ideas, but also increases enthusiasm for the programme itself. Most customers and employees enjoy being part of an organization that is committed to operating in a socially responsible manner.
- 45. SUSTAINABILITY REPORTING Sustainability reporting is not just report generation from collected data; instead it is a method to internalize and improve an organization’s commitment to sustainable development in a way that can be demonstrated to both internal and external stakeholders. It is the disclosure and communication of environmental, social, and governance (ESG) goals—as well as a company’s progress towards them BANEFITS OF SUSTAINABILITY REPORTING: improved corporate reputation, building consumer confidence, increased innovation, and even improvement of risk management.
- 46. INTEGRATED REPORTING Integrated reporting refers to representation of the financial and non-financial performance of a company in a single report. This helps in providing a greater context to the non-financial data such as how the company performs on environmental, social and governance (ESG) parameters, how sustainability is embedded in the core business strategy etc. BENEFITS: ▪ demonstrate that the company is serious about incorporating sustainability into its core business ▪ Communicate the impact of company’s operations on environment and community and illustrate a company’s commitment to mitigate the effects. ▪ A company make informed decisions and improve its overall performance ▪ Identify cost savings by analysing financial and non-financial metrics together. ▪ Increase internal collaboration between different departments and create a more streamlined organisation ▪ Increase engagement with internal and external stakeholders through consistent and balance reporting
- 47. SOCIALLY RESPONSIBLE INVESTING Socially responsible investing, or SRI, is the act of choosing your investments on the basis of social good as well as financial gain. Socially responsible investors aim to invest in companies that do business in positive and responsible ways. In general, they look for companies that have a good record on what are known as ESG issues: environment, social justice, and corporate governance. Goals of Socially Responsible Investors: The essence of SRI is choosing investments that are in line with your values. However, those values aren’t the same for all investors. ▪ Cleaner Environment ▪ Social Justice ▪ Promoting Peace. ▪ Promoting Health. ▪ Promoting Morality Moving your money into socially responsible investments is really a win-win. It lets you make the most of your money in two different ways: You can earn good returns, and promote values that are important to you. The only real downside is that it takes a bit more work to find the right investments to meet two sets of goals – social and financial – instead of just one. But the good news is, that’s a job you only have to do once. Once you’ve made your investment choices, you can just keep putting your money in the same place, secure in the knowledge that it’s going toward companies you can approve of.
- 48. 5. Develop measures and standards of performance :The implementation of sustainable development objectives, and the preparation of meaningful reports on performance, require appropriate means of measuring performance. 6. Prepare reports :The next step in the process is to develop meaningful reports for internal management and stakeholders, outlining the enterprise’s sustainable development objectives and comparing performance against them. 7. Enhance internal monitoring processes :Monitoring can take many forms, such as: ▪ Reviewing reports submitted by middle managers; ▪ Touring operating sites and observing employees performing their duties; ▪ Holding regular meetings with subordinates to review reports and to seek input on how the procedures and reporting systems might be improved; ▪ Implementing an environmental auditing programme.
- 49. Thank you