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CHAMELIDEVI SCHOOL

OF MANAGEMENT

INDORE

SESSION2011-2012

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WELCOME

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CORPORATE GOVERNANCE

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CONTENTS

Meaning.

Definition.

Objectives.

Theories.

Problems.

Conclusion.

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MEANING

Corporate governance is the set of processes,

customs, policies, laws, and institutions

affecting the way a corporation (orcompany) is directed, administered or

controlled. Corporate governance also

includes the relationships among the many

stakeholders involved and the goals for

which the corporation is governed.

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DEFINITION

Corporate Governance is the system bywhich companies are directed andcontrolled

Cadbu ry Report (UK), 1992

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An Indian Definition

fundamental objective of corporate

governance is the enhancement of the long-

term shareholder value while at the same time

protecting the interests of other stakeholders.

SEBI (Kumar Mangalam B ir la) Report on Corpo rate

Governance, January, 2000

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OBJECTIVES

To build up an environment of trust &

confidence amongst competing & conflicting

interest.

To enhance shareholders value & protect the

interest of other stakeholders by enhancing the

corporate performance & accountability.

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The Cadbury Report 1992

Focus on three areas

Board of Directors

Auditing

Shareholders

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Recommendations

BODs are most important, so requires

continuous monitoring and assessment.

Focus on corporate transparency and

communication with shareholders.

Role of Institutional Investors should be more

active as they are most influential group of

shareholders

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Contt

Chairman and CEO

The roles to be separated

Chairman Head of the Board andCEO- Head of the Company Management

Non-Executive directors - The board should

have majority non-executive directorsTop Management Compensation Separating

salary and performance bonus

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Contt

BOD should report on the effectiveness of

companys systems of internal control

The Directors service contracts should not

exceed 3 years without approval by the

shareholders

Each listed company should establish an

audit committee of at least 3 non executive

directors

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CG Committees formulated in India

CII Committee

Birla Committee

Narayana Murthy CommitteeJJ Irani Committee

Clause 49 of Listing agreement of SEBI(Jan

2006)

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THEORIES

Agency Theory.

Stewardship Theory.Shareholder Theory.

Stakeholder Theory.Political Theory

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Agency Theory

The very term agency suggest a relationship

between two elements or entities. In this case

it is between principals or promoters of acompany & their agents or managers who

implements the formers brief.

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Agency relationships occur when one partner

in a transaction (the principal) delegates

authority to another (the agent) and the welfare

of the principal is affected by the choices of

the agent

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Stewardship Theory

The stewardship theory assumes that managers

are good & trustworthy. They are appointed

mainly due to their good reputation. This isdone with the intention to cut bureaucracy &

increase motivation, which will help the

managers take quick decisions.

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The inclination of individuals to act as selfless

stewards may be culturally contingent. The

'company man' in Japan may place his

employer before family. The voluntary

resignation of executives is not uncommon

when a firm is disgraced and instances of

suicide are still reported.

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Shareholder Theory

The important assumptions of this theory is

that an individual has a complete &

inalienable right to a private property & thatindividual liberty ensures it. Holding stocks or

shares in a company are a form of private

property ownership, & the shareholder alone is

its rightful owner.

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Stakeholder Theory

The purpose of the firm is to create wealth or

value for its stakeholders by covering their

stakes into goods and services.

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In defining 'Stakeholder Theory' Clarkson

(1994) states: '"The firm" is a system of stake

holders operating within the larger system of

the host society that provides the necessarylegal and market infrastructure for the firm's

activities. The purpose of the firm is to create

wealth or value for its stake holders byconverting their stakes into goods and

services'.

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The Political Theory

The political model recognises that theallocation of corporate power, privileges and

profits between owners, managers and other

stakeholders is determined by howgovernments favour their various

constituencies. The ability of corporate

stakeholders to influence allocations betweenthemselves at the micro level is subject to the

macro framework, which is interactively

subjected to the influence of the corporate

sector.

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Models of CG

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Anglo American German Japanese

Share holders Shareholders andemployees /unions

Shareholders and banks

Elects Elects Elects

Board of Directors Supervisory Board Supervisory Board

appoints President And

President

Appoints Appoints Appoints

Officers/Executive Management Board Executive Board

Manage Manage

Manage

Company Company Company

Indian Model = Anglo American Model +German Model

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Anglo American Model

Wide spread shareholding

Separation of ownership and management

Professional managers

Single board structure

Focus on mainly on Shareholders

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Contt

In the case of German model employees have a

role

Where as in Japanese Banks/financial

institutions have a role in the board as stake

holders

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Tata Group

Infosys

L & T

HDFC

MukeshAmbani

Others

35%

25%9%

7%

5%

19%

Investors Favorite Companies

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Thanks A Lot