Class 7 Corporate Governance

8/2/2019 Class 7 Corporate Governance

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Corporate Governance


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Why Strategy fails?

Formulation failure Inability to forecast environmental trends

Not able to foresee competitive moves

Wrong business definition

Implementation failure Structure & systems Culture & Ethics

Leadership (Most important??)


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Strategy Control

Types of Control:

Behavior Controls Policies, rules, SOPs, directives

Output Controls

Objectives, targets, milestones

Input Controls

Resources, knowledge, skills, values


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Ownership

Indicates ownership control

Shareholders (Owners and Directors:Same??)

Persons responsible for direction areaccountable to owners


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Agency Theory explains key reason of failure?

Problems arise in corporations

because the agents (BOD and topmanagement) are not willing towork in the interest of owners

(especially small).


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Influence of Stakeholders

SHAREHOLDERS

BOARD

MANAGEMENT

PRODUCT/ MARKETS

FINANCIAL

MARKETSOTHER

STAKEHOLDERS


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Management of Board

FRAUD

CONFLICT OF INTEREST

FREEDOM TO MANAGE


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Governance

Derived from latin word gubernare whichmeans to ruleor to steer

Indicates ability, capability & stabilityofCorporates

Corporate Governance Practices impartbalance between exercise of powerandacceptance of accountability


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Defined:

Refers to the relationship among

the board of directors, topmanagement, and shareholders

in determining the direction and

performance of the corporation.


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RELATIONSHIPS AMONG:

SHAREHOLDERS

MANAGERSDIRECTORS


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No consistent link between boardmembership, leadership, structure, andfinancial performance of firm

Investors pay more for a firms stock whenpositive toward good corporate governance

Belief that Good governance leads to better performance over

time

Reduces risk of company finding itself in trouble

Governance is a major strategic issue


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Governance vis--visManagement

Governance Management

Strategy Oriented Task OrientedFraming of Policy Execution of Tasks

External Focus Internal Focus

Better Governance leads to BetterManagement


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Synonym for sound management,transparency and disclosure

In the words of J. Wolfensohn, formerPresident of the World Bank,

Corporate Governance is about promotingcorporate fairness, transparency andaccountability


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Direction

Laying down Policy Decisions

Guidelines what is to be done asopposed to how to be done


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Setting corporate strategy, overalldirection, mission or vision

Hiring and firing the CEO and topmanagement

Controlling, monitoring, or supervising

top management

Reviewing and approving the use ofresources

Caring for shareholder interests

Board ofDirectors


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Role of the Board in strategic management

Monitor Developments inside and outside the corporation

Evaluate & Influence Review proposals, advise, provide suggestions

and alternatives

Initiate & Determine Delineate corporations mission and specify

strategic options


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Board Structure

SIZE

COMPOSITION

COMPETENCES

COMPENSATION


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Board Processes

COMMITTEESAUDIT

REMUNERATION

FINANCE

STYLE

TASKS


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Board of Directors

Board of

Director

Membership

Wiling to challengemanagementSpecial expertiseAvailability for advice and

meetingsExpertise on global issuesUnderstands key technologiesExternal contacts valuable tothe firm

Detailed knowledge of industryHigh visibility in fieldAccomplished in representingfirm to stakeholders


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Board of Directors

Boards more involved in reviewing,evaluating, and shaping strategy

Institutional investors active onboards

pressure on CEO for firmperformance

Shareholders demand directors ownmore than token amounts of thefirms stock


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Board of Directors

Boards becoming smaller

Boards taking more control of board

functionsCorporations becoming more global;international experience needed

Societal expectations that boards balance

profitability and social responsibilityDiversity of board members


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Why Corporate Governancenow?

Failure of a corporation affects shareholders

employees (they tend to lose their jobs)

customers (they are deprived of quality productsand concerns are raised about after sales service)

government (they lose revenue and have to dealwith problem of unemployment)

lenders (sticky loans now called as non-performingassetsNPAs)

creditors (fear of non-recovery of amounts due)

suppliers (lose valuable customers which is turn

affects their operations)


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Why Corporate Governancenow?

Overwhelming Public Interest

Erosion in faith of stakeholders

No corporation can work in isolation; whathappens in one affects others and the

economy as well

All stakeholders feel impact


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Core of Corporate Governance

Independence

Disclosure

TransparencyEthics

Risk Assessment

Risk Containment/ManagementEntire model of Corporate Governance is based

on JUDGMENT, PRUDENCE & WISDOM


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Action

HabitsCharacter

ThoughtsWords


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Watch your actions, they become your habits

Watch your habits, they become your character

Watch your character, they become your thoughts

Watch your thoughts, they become your words

Watch your words, they become your actions


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Independent Directors

Meaning of Independence

Are they policemen in civil clothes?

Degree of IndependenceShould independent directors possessbusiness intellect?

Freedoms

Are freedoms unfettered?Remuneration

Skill Enhancement


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Ethics

Ethics is knowing thedifference between what

you have a right to do andwhat is right to do.

..Potter Stewart


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Social Responsibility

Key question for strategic decision makers:

Should strategic decision makers be

responsible only to shareholders or dothey have broader responsibilities?


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Friedmans Traditional View

There is one and only one socialresponsibility of business to use itsresources and engage in activitiesdesigned to increase its profits


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Carrolls Four Responsibilities

Economic

Legal

Ethical

Discretionary


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Moral Relativism

Morality is relative to somepersonal, social or culturalstandard and that there is no

method for deciding whether onedecision is better than another.


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Kohlbergs Levels of

Moral Development

Preconventional Level

Concern for self

Conventional Level Consideration of laws and norms

Principled LevelAdherence to internal moral code


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Code of Ethics:

Specifies how an organizationexpects its employees to behavewhile on the job.


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EthicsThe consensually accepted standards of behaviorfor an occupation, trade, or profession

MoralityThe precepts of personal behavior based onreligious or philosophical grounds

Law

Formal codes that permit or forbid certainbehaviors


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Approaches to Ethical Behavior

Utilitarian

Actions and plans judged by consequences

Individual Rights

People have fundamental rights to berespected in all decisions

Justice

Distribution of costs and benefits to beequitable, fair, and impartial


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Why Ethical Code?

To command respect and confidence

To maintain Independence

To maintain IntegrityTo maintain Excellence

To ensure Objectivity

To ensure Ethical Behaviour


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Ethics

Integrity without knowledge is

weak and useless, andknowledge without integrityis dangerous and dreadful.

..Samuel Johnson


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SEBI Framework

Controls through Clause 49 of theListing Agreement

Board of Directors Composition

Executive:Non-executive Directors 50:50

Non-executive Chairman 1/3rd Independent

Directors Executive Chairman 50% Independent

Directors


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SEBI Framework

Board of Directors

Compensation

Prior approval of shareholders Frequency of Meetings

4 meetings, Gap not to exceed 4 months

Code of Conduct Board + Senior Management


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SEBI Framework

Audit Committees

Composition

3 Directors, 2/3rd

independent, financiallyliterate

Meetings 4 per year

Gap between 2meetings Max. 4 months


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SEBI Framework

Audit Committees Powers

To investigate any activity within its terms of reference.

To seek information from any employee.

To obtain outside legal or other professional advice.

To secure attendance of outsiders with relevantexpertise, if it considers necessary.

Role Review of Information


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SEBI Framework

Subsidiary Companies

Disclosures

Related Party Transactions Disclosure of Accounting Treatment

Board Disclosures Risk Management

Proceeds from Public Issues, Rights Issues etc

Remuneration of Directors Management

Shareholders


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SEBI Framework

CEO/CFO Certification

Report on Corporate Governance

Compliance Certificates


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Powers of Directors

General Powers

Power vests in BOD can do all such acts

and things as the company is authorised toexercise and do

Restrictions on powers of Board Some powers to be exercised through resolutions

in Board Meetings Making calls, Issuing Debentures, Borrowing

Money, Investing Funds, Making Loans


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Control by Directors

Annual operating plans and budgets

Capital Budgets

Results of Company and its divisions andsegments

Minutes of committees of Board

Information on Senior Level Appointments

Show cause, demand, prosecution andpenalty notices

Accidents, Dangerous Occurrences, Pollutionproblems


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Control by Directors

Default in financial obligation

Details of Joint Venture or CollaborationAgreements

Significant investment in Assets, Trademarks,Goodwill etc.

Related Party Transactions

Significant Labour ProblemsForeign Exchange Exposures

Non-compliance of regulatory and statutoryrequirements


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Evaluation and Control


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Strategic Audit:

Type of management audit that isextremely useful as a diagnostic toolto pinpoint corporate-wide problemareas and to highlight organizational

strengths and weaknesses.

A dit St


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Audit Steps:

Evaluate current performance results

Review corporate governance

Scan and assess the external environment Scan and assess the internal environment

Analyze strategic factors using SWOT

Generate and evaluate strategic alternatives

Implement strategies Evaluate and control


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Styles of Corporate Governance

Entrepreneurship

management

Partnership

management

Chaos

management

Remote

managementD

egreeofInvolvement

ByTopManag

ement

Degree of InvolvementBy Board of Directors

High

Low

Low High


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Board of Directors Continuum

Phantom

Rubber

Stamp

Minimal

Review

Nominal

Participation

Active

Participation Catalyst

Never knowswhat to do, ifanything; nodegree ofinvolvement.

Permits officersto make alldecisions. Itvotes as theofficers recom-mend on actionissues.

Formallyreviewsselected issuesthat officersbring to its

Involved to alimited degreein the perform-ance or reviewof selected keydecisions,indicators, orprograms ofmanagement.

Takes theleading role inestablishingand modifyingthe mission,objectives,strategy, andpolicies. It hasa very activestrategycommittee.

Low(Passive)

High(Active)

Approves,questions, andmakes final de-cisions on mis-sion, strategy,policies, andobjectives. Hasactive boardcommittees.Performs fiscaland manage-ment audits.

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT


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Top Management

Responsibilities of Top Management:

Provide executive leadership and astrategic vision

Manage the strategic planning process


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Top Management

CEO and Clear Strategic Vision

Common Characteristics:

CEO articulates a strategic vision

CEO presents a role for others

CEO communicates high performance

standards and shows confidence infollowers


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Defining CEO

In an organization that has a board of directors,

the "chief executive officer" is (usually) the singular

organizational position that is primarily responsible

to carry out the strategic plans and policies as

established by the board of directors.Chief executive reports to the board of directors

Without a board of directors (sole proprietorship,

partnership, etc.),

the "chief executive officer" is (usually) the singularorganizational position (other than partnerships, etc.)

that sets the direction and oversees the operations

of an organization.


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Role of CEO

LEADER

Advises the Board

Advocates / promotes organization and stakeholder change related to

organization mission

Supports motivation of employees in organization products/programs and

operations

VISIONARY / INFORMATION BEARER Ensures staff and Board have sufficient and up-to-date information

Looks to the future for change opportunities

Interfaces between Board and employees

Interfaces between organization and community

DECISION MAKER

Formulates policies and planning recommendations to the Board

Decides or guides courses of action in operations by staff

l f


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Role of CEO

MANAGER Oversees operations of organization

Implements plans Manages human resources of organization

Manages financial and physical resources

BOARD DEVELOPER Assists in the selection and evaluation of board members Makes recommendations, supports Board during orientation and self-

evaluation

Supports Board's evaluation of Chief Executive

l d & Skill l f C O


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Knowledge & Skill Role of CEO

Basics in Management and Leadership

Planning

Organizing

Leading

Coordinating Activities and Resources (including

performance management)

Role: Chairman


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The chairman's role includes managing the

board's business and acting as its facilitator and

guide.

This can include:

Determining board composition and

organization;Clarifying board and management

responsibilities;

Planning and managing board and boardcommittee meetings;

Developing the effectiveness of the

board.


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Strategic Management Process

Strategic Planning Staff --

Supports top management andbusiness units in the strategicplanning process.

Strategic Management Process


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Strategic Management ProcessStrategic Planning Staff

Responsibilities:

Identify and analyze company-wide

strategic issues, suggest corporatestrategic alternatives

Work as facilitators with business

units to guide them through thestrategic planning process

Risk Assessment &


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Risk Assessment &Management

Risk Assessment &


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Risk Assessment &Management

Class 7 Corporate Governance

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