Internal Corporate

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Internal corporate governance

mechanism


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Internal corporate control is a process, effected by an entitysboard of directors, management and other personnel, designed

to provide reasonable assurance regarding the achievement of

objectives in the following categories:

Effectiveness and efficiency of operations

Reliability of financial reporting

Compliance with applicable laws and regulations

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Internal corporate governance


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OBJECTIVE

Internal controls are established to further

strengthen:

The reliability and integrity of information. Compliance with policies, plans, procedures, laws and

regulations.

The safeguarding of assets.

The economical and efficient use of resources. The accomplishment of established objectives and goals for

operations or programs.

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INTERNAL GOVERNANCE MECHANISMS

Ownership Concentration

Relative amounts of stock owned by

individual shareholders and institutional

investors

Board of Directors

Individuals responsible

for representing the firms

owners by monitoring top-level

managers strategic decisions

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Executive Compensation

Use of salary, bonuses, and long-term

incentives to align managers interests with

shareholders interests

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Large block shareholders have astrong incentive to monitormanagement closely:

Their large stakes make it worth

their while to spend time, effortand expense to monitor closely

They may also obtain Boardseats which enhances their ability

to monitor effectivelyFinancial institutions are legally

forbidden from directly holdingboard seats

OwnershipConcentration (a)


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(CONTD)

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Shareholder activism:

Shareholders can convene to

discuss corporations direction

If a consensus exists,shareholders can vote as a block

to elect their candidates to the

board

Proxy fights There are limits on shareholder

activism available to institutional

owners in responding to activists

tactics

OwnershipConcentration (b)


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(CONTD)

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Board of directors

Group of elected individuals that

acts in the owners interests to

formally monitor and control the

firms top-level executives

Board has the power to:

Direct the affairs of the

organization Punish and reward managers

Protect owners from managerial

opportunism

OwnershipConcentration

Board of Directors

(a)


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(CONTD)

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Composition of Boards: Insiders: the firms CEO and

other top-level managers

Related Outsiders: individuals

uninvolved with day-to-dayoperations, but who have arelationship with the firm

Outsiders: individuals who areindependent of the firms day-to-

day operations and otherrelationships


Board of Directors

(b)


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(CONTD)

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Forms of compensation:

Salary, bonuses, long-term

performance incentives, stock

awards, stock options

Factors complicating executive

compensation:

Strategic decisions by top-level

managers are complex, non-

routine and affect the firm over

an extended period

Other variables affecting the

firms performance over time


Board of Directors

Executive

Compensation


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INTERNATIONAL CORPORATE GOVERNANCE

Germany Owner and manager are often the

same in private firms

Public firms often have a dominant

shareholder, frequently a bank Frequently there is less emphasis on

shareholder value than in U.S.

firms, although this may be

changing

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Responsible for the functions of

direction and management

Responsible for appointing

members to the Vorstand

Responsible for appointing

members to the Aufsichtsrat

Vorstand

Aufsichtsrat

Employees Unionmembers

Shareholders

Germany: (Two-tiered Board)


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INTERNATIONAL CORPORATE GOVERNANCE:

Japan

Important governance factors:

Obligation

Family

Consensus

Banks (especially main bank) are

highly influential with firms managers

Keiretsus: strongly interrelated groups

of firms tied together by cross-

shareholdings

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Japan (contd)

Other governance characteristics:

Powerful government intervention

Close relationships between firms and government sectors

Passive and stable shareholders who exert little control

Virtual absence of external market for corporate control

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DUTIESOFTHEDIRECTORS

Exercise care in the discharge of functions as Directors

Attend Board meetings and devote sufficient time and

attention to the affairs of the company

Not to be negligent and not to commit or let otherscommit tort-liable acts

(Tort -wrongful act that causes injury to a person or

property and for which the law allows a claim by the

injured party to recover damages -money)

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DUTIESOFTHEDIRECTORS

Not to misuse power

Protect the interests of creditors and employees

Maintain confidentiality

Not to exercise power for a collateral purpose Not to waste company assets

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ROLEOF CHAIRMAN

o Manage the board and conduct of meetings

o Good business and financial knowledge

o Maintain good relations with the Executive directors

Independent directors and CEO

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ROLEOF CEO WITHRESPECTTOBOARD

Good relationship with directors and Chairman

Assist the executive directors in presenting the strategic

proposals

To present the company to the investors To act as a representative of executive directors while

interacting with independent directors

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FUNCTIONSOFTHEBOARD

Strategic role

Policy making role - Like code of conduct

Monitoring and supervisory role

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COMMITTEESOFTHEBOARD

Audit committee

Compensation Committee

Nomination committee

Finance committee

Investors grievance committee

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CORPORATE CODE

Corporate Codes are the policy statements which guides

the behavior of employees based on the value systems of

the company.

The top management and board has the responsibility

prepare the Corporate Code

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TYPESOFCORPORATECODES

Compliance Code : Directive Statements which provide

guidance and prohibit certain kind conduct

Corporate Credos: The broad general statements of

corporate commitments relating to constituencies, values

and Objectives

Management Philosophy Statements : The formal

statements of companys value system

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TYPESOF COMPLIANCECODE

Special documents Code of conduct

Circulated letters about company policies foremployees while dealing business partners

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CODEOF CONDUCT

Companies' policy statements that define ethical standards for theemployee conduct

Code varies from company to company

Can take a number of formats and address any issue - like

workers' rights, behavior with customers . Codes of conduct create a proper environment to help identify

and reinforce within the firm those critical success factors whichimprove its capacity to compete in a rapidly changingenvironment.

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PROCESSOFCORPORATECODE

Identification of key behaviordeveloping the code

Review

Communicate the code

Implement Update

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WHISTLEBLOWER

A whistleblower is a person who tells the public or

someone in authority about alleged dishonest ormisconduct occurring in a organization.

The alleged misconduct which are reported, by andlarge, include an violation of law, rule, regulation or a

direct threat to public interest, such as fraud,

health/safety violations, and corruption

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KINDSOF WHISTLEBLOWERS

Internal whistle blowers - report misconduct on a fellow

employee or superior within their company.

Personal whistle blowers- blow the whistle on the

offender, here the charge is not against the organization

or system but against one individual

External whistle blowers -report misconduct on outsidepersons or entities.

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CRITERIA FOR JUSTIFIABLE WHISTLE BLOWING

1. The firm through its product or policy will do serious andconsiderable harm to the public, whether in the person of the user of

its product or the general public.

2. Once an employee identifies a serious threat to the user of a product

or to the general public, he or she should report it to his or her

immediate superior and make his or her moral concern known.

3. If one's immediate superior does nothing effective about the concern

or complaint, the employee should exhaust the internal proceduresand possibilities within the firm. This usually will involve taking the

matter up the managerial ladder, and if necessary and possible to the

board of directors.

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LEGALPROTECTIONFORWHISTLEBLOWING

Legal protection for whistle blowing varies from country to country.

For e.g.:-

The Whistleblower Protection Act of 1989 is a United States federal

law that protects federal whistleblowers

In 2003, the Law Commission of India recommended the adoption of

the Public Interest Disclosure Act, 2002 In the UK, the Public Interest Disclosure Act 1998 provides a

framework of legal protection for individuals who disclose

information so as to expose malpractice

In Jamaica, the Protected Disclosures Act, 2011 provides a

comprehensive system for the protection of whistleblowers inthe public and private sector

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Internal Corporate

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