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THEORIES OF CORPORATE GOVERNANCE
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BUSINESS ETHICS AND CORPORATE GOVERNANCE
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DR SHASHI AGGARWAL
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MEANING OF CORPORATE GOVERNANCE
1.
CONSISTS OF TWO WORDS : CORPORATE PLUS GOVERNANCE
2.
A CORPORATE MEANS A LEGAL ENTITY AND THAT EXIST INDEPENDENT OF PERSONS WHO
HAVE FORMED IT AND IS VESTED WITH MANY OF THE RIGHT GIVEN TO HIS INDIVIDUALS
AND BASICALLY GOVERNED BY BORAD OF DIRECTORS WITH THE CONSENT OF SHAREHOLDERS
3.
GOVERNANCE : DERIVED FROM THEO WORD GUBERNARE WHICH MEANS TO RULE TO STEER
4.
GOVERNANCE IS THE ACT OF FRAMING PLANS AND POLICIES,MONITORING THE SAME TO
ENSURE THEIR PROPER IMPLEMENTATION AND ACCEPTING THE ACCOUNTABILITY FOR THE
AFFAIRS OF A CORPORATION
5.
CORPORATE GOVERNANCE IS THE SYSTEM OF RULES,PRACTICE AND PROCESSES BY WHICH
A FIRM IS DIRECTED AND CONTROLLED. IT TRIES TO BALANCE THE INTERESTS OF
COMPANY’S STAKEHOLDERS SUCH AS SHAREHOLDERS,MGMT,CUSTOMERS,SUPPLIERS,FINANCIERS,GOVT
AND THE COMMUNITY
6.
IT PROVIDE THE FRAMEWORK FOR ACHIEVING ORGANIZATION’S OBJECTIVES,IT COVERS
ALL THE DOMAIN OF THE MGMT FROM ACTION PLANS TO PERFORMANCE MEASUREMENT AND
INTERNAL CONTROLS TO PERFORMANCE MEASUREMENT AND CORPORATE DISCLOSURE.
7.
MORE THAN COMPANY ADMINISTRATION. REFERS TO FAIR,EFFICIENT AND TRANSPARENT
FUNCTIONING OF THE CORPORATE MGMT SYSTEM
8.
REFERS TO CODE OF CONDUCT.
9.
REFERS TO SET OF SYSTEMS,PROCEDURES AND PRACTICED WHICH ENSURE THAT THE COMPANY IS MANAGED IN THE BEST INTEREST OF
ALL CORPORATE STAKE HOLDERS
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MEANING OF CORPORATE GOVERNANCE
• CORPORATE GOVERNANCE IS THE SYSTEM BY WHICH
COMPANIES ARE DIRECTED AND CONTROLLED– BY THE CADBURY COMMITTEE ( UK)
• CATHERWOOD,” CORPORATE GOVERNANCE MEANS THAT
COMPANY MANAGES ITS BUSINESS IN A MANNER THAT IS ACCOUNTABLE AND RESPONSIBLE
TO THE SHAREHOLDERS. IN WIDER INTERPRETATION,CORPORATE GOVERNANCE INCLUDES
COMPANY’S ACCOUNTABILITY TO SHAREHOLDERS AND OTHER STAKE HOLDERS SUCH AS
EMPLOYEES,SUPPLIERS.CUSTOMERS AND LOCAL COMMUNITY.”
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IMPLIES THAT THE COMPANY WOULD MANAGE ITS AFFAIRS WITH
DILIGENCE,TRANSPARECNY,RESPONSIBILITY AND ACCOUNTABILITY AND WOULD MAXIMIZE SHAREHOLDER’S
WEALTH. HENCE IT IS REQUIRED TO DESIGN SYSTEMS,PROCESSES,PROCEDURES,STRUCTURES
AND TAKE DECISIONS TO AUGMENTS ITS FINANCIAL PERFORMANCE AND THE STAKEHOLDER
VALUE
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INSTITUTE OF COMPANY SECRETARIES OF INDIA
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CORPORATE GOVERNANCE IS THE APPLICATION OF BEST
MANAGEMENT PRACTISES,COMPLIANCE OF LAW IN TRUE LETTER AND SPIRIT AND ADHERENCE
TO ETHICAL STANDARD FOR EFFECTIVE MANAGEMENT AND DISTRIBUTION OF WEALTH AND
DISCHARGE OF SOCIAL RESPONSIBILITY FOR SUSTAINABLE DEVELOPMENT OF STAKEHOLDER
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NEED FOR CORPORATE GOVERNANCE
1.
WIDE SPREAD OF SHAREHOLDERS
2.
CHANGING OWNERSHIP STRUCTURE:- WITH INSTITUTIONAL INVESTORS AND MUTUAL FUNDS
LARGEST SHAREHOLDERS. FORCING THE COMPANY TO ABIDE THE CODE OF CONDUCT
3.
CORPORATE SCAMS: FOR REVIVING THE INVESTOR’S CONFIDENCE
4.
GREATER EXPECTATION OF THE SOCIETY OF THE CORPORATE SECTOR
5.
HOSTILE TAKE OVERS: EFFICIENT CODE OF CONDUCT
6.
HUGE INCREASE IN TOP MGMT COMPENSATION
7.
GLOBALIZATION:INTERNATIONAL CAPITAL MARKET RECOGNIZE WELL MANAGED COMPANIES
ACCORDING TO STANDARD OF CODE OF CONDUCT
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PRINCIPLES OF CORPORATE GOVERNANCE
1.
TRANSPARENCY:-ADEQUATE AND TIMELY DISCLOSURE OF RELEVANT INFORMATION ABOUT
THE OPERATING RESULT. FOUNDATION OF CORPORATE GOVERNANCE. A COMPANY SHOULD
PUBLISH RELEVANT INFORMATION ABOUT CORPORATE AFFAIRS IN LEADING NEWSPAPERS.
2.
ACCOUNTABILITY:-RESPONSIBILITY OF THE CHAIRMAN ,BOD AND THE CHIEF EXECUTIVE
FOR THE USE OF THE COMPANY’S RESOURCES IN THE BEST INTEREST OF THE COMPANY AND
ITS STAKEHOLDERS
3.
INDEPENDENCE:-GOOD CORPORATE GOVERNANCE REQUIRES INDEPENDENCE ON THE PART OF
THE MGMT OF THE CORPORATION. BOD TAKE THE DECISIONS ON THE BASIS OF WISDOM.
4.
FAIRNESS : A WELL GOVERNED COMPANY MUST EXERCISE COMPLETE FAIRNESS IN ITS
DEALING WITHOUT ANY DETRIMENT TO THE INTEREST OF STAKEHOLDERS,EMPLOYEES AND
PUBLIC AS WHOLE. THE RIGHTS AND INTEREST OF ALL STAKEHOLDERS SHOULD BE
RECOGNIZED AND RESPECTED IN BALANCED MANNER.
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FEATURES OF CORPORATE GOVERNANCE
1.
REPRESENTS THE WELL DEFINED SET OF SYSTEMS AND PROCESS IN WHICH BUSINESS
DECISIONS ARE TO BE TAKEN
2.
IS PURSUED TO MAKE THE TOP MANAGEMENT AND BOD ACCOUNTABLE TO SHAREHOLDERS AND
STAKEHOLDER
3.
USEFUL CONCEPT FOR THE STAKEHOLDERS
4.
USED TO MONITOR WHETHER THE OUTCOME ARE IN ACCORDANCE WITH THE PLANS AND
KEEP THE MANAGEMENT FULLY INFORMED
5.
THE GOOD GOVERNANCE HELPS TO ASSURE THE WELL FUNCTIONING OF THE MARKETS
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THEORIES OF CORPORATE GOVERNANCE
1.
AGENCY THEORY
2.
THE STEWARDSHIP THEORY
3.
THE STAKEHOLDER THEORY
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THE AGENCY THEORY
1.
BASIC THEORETICAL BASE OF CORPORATE GOVERNANCE
2.
BASED ON THE CONCEPT OF SEPARATION OF OWNER AND CONTROL
3.
SHAREHOLDERS WHO ARE THE OWNERS OF THE COMPANY DECIDES THE OBJECTIVES OF THE
COMPANY AND APPOINT THE MANAGERS AS THEIR AGENTS TO ACCOMPLISH OBJECTIVES
4.
ACCORDING TO AGENCY THEORY MANAGERS WHO ARE WORKING AS AGENTS ARE REQUIRED TO
APPLY AND UTILIZE THE RESOURCES FOR THE AUTHORISED PURPOSE AND ACHIEVE THE
MAXIMIZATION OF WEALTH OF SHAREHOLDERS
5.
DIRECTORS AND MANAGERS HAVE AN EDGE OVER THE SHAREHOLDERS DUE TO THEIR
EXPERTIZE AND A CONFLICT OF GOALS OCCURS
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ASSUMPTIONS AND PROPOSITIONS OF AGENCY THEORY :
1.
MANAGERS ARE INSPIRED BY SELF INTEREST AND TAKE UNDUE ADVANTAGE OF THEIR
POWER TO MAXIMIZE THEIR OWN WELFARE AT THE COST OF SHAREHOLDERS
2.
GOVERNANCE MECHANISM ARE NEEDED TO RESTRICT THE SELF SERVING BEHAVIOUR OF
MANAGERS
3.
EFFICIENT CAPITAL AND LABOUR MARKET CAN CHECK THE SELF SERVING BEHAVIOR OF
THE MANAGERS
4.
THE BOD MUST ACT INDEPENDENTLY IN THE BEST INTERESTS OF THE SHAREHOLDERS
5.
AN EFFECTIVE BOARD CONSISTS OF MAJORITY OF INDEPENDENT DIRECTORS
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CRITICISM
1.
OVERSTRESS THE WEALTH MAXIMIATION OF SHAREHOLDER BUT IGNORES THE INTERESTS OF
OTHER STAKEHOLDERS
2.
STRUCTURE OF THE BOD IN TERMS OF EXECUTIVE/NON EXECUTIVE DIRECTORS CANNOT
SOLVE THE AGENCY PROBLEM
3.
ASSUMPTION THAT INDEPENDENT DIRECTORS LEAD TO SUPERIOR CORPORATE PERFORMANCE
HAS PROVED WRONG
4.
NARROW VIEW OF CORPORATE GOVERNANCE AS IT SUGGEST THAT COMPANY IS
RESPONSIBLE TO SHAREHOLDERS
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THE STEWARDSHIP THEORY
- RULES OUT THE CONFLICT BETWEEN MANAGERS AND OWNERS
- ESTABLISHES THAT THE MANAGERS ARE TRUSTWORTHY AND NOT PRONE TO
MISAPPROPRIATE THE FUNDS OF THE INVESTORS
- ALSO KNOWN AS TRUSTEESHIP THEORY
- WHICH MAINTAINS THE INTERESTS OF THE OWNERS OF THE COMPANY AND MANAGERS
ARE ALIGNED WITH EACH OTHER AND WORK TO ACHIEVE COLLECTIVE GOALS
- BOD AND CEOS SHOULD BE GIVEN ADEQUATE AUTHORITY AND DISCRETION TO ACT
AS GOOD STEWARDS
6.
THEORY VIEW MGRS AS STEWARD ASSUMED TO BE SELF MOTIVATED,WORK EFFICIENTLY
AND HONESTLY IN THE INTERESTS OF THE COMPANY AND OWNERS.
- EMPHASIS ON FINANCIAL REPORTING DISCLOSURES AND AUDITING AS IMPORTANT
MECHANISM TO REGULATE THE BEHAVIOUR OF MANAGERS
- FEEL CONSTRAINED IF THEY ARE CONTROLLED BY THE OUTSIDE DIRECTORS
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ASSUMPTIONS AND PROPOSITION OF STEWARDSHIP
THEORY
1.
THE MANAGERS ARE NOT MERE AGENTS OF THE SHAREHOLDERS AND THEY ARE GOOD
STEWARDS OF THE COMPANY AND WORK DILIGENTLY FOR THE BENEFITS OF SHAREHOLDERS
2.
MANAGERS ARE GUIDED BY THE MOTIVE OF EARNING PERSONAL REPUTATION IN THE
STOCK MARKET
3.
CHIEF EXECUTIVE SHOULD BE GIVEN AUTHORITY AND DISCRETION
4.
AUDITING AND FINANCIAL REPORTING ARE THE MAIN MECHANISM TO REGULATE
MANAGERIAL BEHAVIOUR
5.
BASED ON TRUSTEESHIP
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THE STAKEHOLDERS THEORY
1.
BROADER VIEW POINT AND LAYS EMPHASIS ON THE FACT THAT CORPORATION MUST TAKE
INTO ACCOUNT WIDER INTEREST OF THE SOCIETY WHILE PURSUING THEIR BUSINESS
2.
THE CONSTITUENT GROUP IS KNOWN AS STAKEHOLDERS AND ORGANIZATION HAS
RELATIONSHIP WITH MANY CONSTITUENTS
3.
BASED ON THE PREMISES THAT THE FUNDAMENTAL RESPONSIBILITY OF THE MANAGERS TO
MAXIMIZE THE TOTAL WEALTH OF ALL STAKEHOLDERS
4.
TO EMPOWER STAKEHOLDERS
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ASSUMPTIONS
1.
EXIST A SOCIAL CONTRACT BETWEEN A COMPANY AND ITS STAKEHOLDERS. COMPANY USES
SOCIETY’S RESOURCES AND ENJOYS SPECIAL PRIVILEGES FROM SOCIETY.IT MUST ACT IN
THE BEST INTERESTS OF ALL SECTIONS OF SOCIETY
2.
THE STAKEHOLDERS THEORY HOLDS THAT THE STAKEHOLDERS HAVE DIFFERENT GOALS AND
SEEK DIFFERENT FROM THE FIRM
3.
THE ULTIMATE PURPOSE OF THE COMPANY IS TO CREATE FOR ALL STAKEHOLDERS GROUP
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CRITICISM
1.
MAJOR PROBLEM IN DEFINING THE CONCEPT OF STAKEHOLDERS
2.
SEVERAL STAKEHOLDERS AND THEIR INTERESTS MAY BE CONTRADICTORY
3.
DIRECTORS AND MANAGERS ATTEMPT TO SERVE SEVERAL GROUPS AND THEY MAY FAIL TO
SATISFY THOSE WHO HAVE A GENUINE CLAIM ON THE COMPANY
4.
UNDERMINES THE PRIVATE PROPERTY BY DENYING THE OWNER’S RIGHT TO DECIDE AS
HOW THE PROPERTY WILL BE USED
5.
MANAGERS WHO OWE FIDUCIARY DUTY TOWARDS THE SHAREHOLDERS WHICH IS NOT
GRANTED TO OTHER STAKEHOLDERS
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