Fundamentals of Corporate Governance

Fundamentals of
Corporate Governance


Corporate Governance - Meaning



Corporate Governance is a value-based approach to running a company in a manner that is consistent with the interests of all stakeholders.

It is enabled by a set of laws, systems, processes and principles which ensure that a company is governed properly and in the best interest of all its stakeholders.




Key Terms in Corporate Governance
Stakeholder
A person/ company/ firm / or any other entity with an interest in a business and its activities .

Leadership
The action of leading a group of people or an organization\'; \'the state or position of being a leader\'

Board of Directors (commonly referred to as Board)
A group of individuals elected by the shareholders of a company as their representatives to consider and decide on major issues of the Company.
There are broadly two types of Directors:
- Executive Director –Directors with executive responsibilities.
- Non- Executive Director – Directors without any executive responsibilities (they are usually part time).



Shareholder
A person, company, institution or other entity that owns at leas t one share of a company’s stock.

Board Meeting
A meeting of the Board of Directors.

Board Committee
A group of members of the Board of Directors who, as a Committee , carry out specific functions assigned to them by the Board, and by law.

Annual General Meeting (AGM)
An annual meeting of the shareholders with the Board and the sen ior management of a company.

Annual Report
A detailed report on a company ’s activities throughout the preceding year and its outlook for the future.




Evolution of Corporate Governance

“Businessmen are trustees” and
“The ends do not justify the means”- Mahatma Gadhi

- Read together, these statements offer the best explanation of Corporate Governance.
- Historically, companies did not govern themselves transparently and only sought to maximise the interests of the promoters, leading to frauds and scams.
- This resulted in Corporate Governance systems and laws being put in place.
- Initial laws on Corporate Governance focused on the rights of shareholders only.
- Now the focus is on all stakeholders of business.


Why Corporate Governance?



Conflict of interest between different stakeholders
+
Asymmetry of information between different stakeholders





Need for Corporate Governance



- To ensure that a company runs in a LAWFUL and ETHICAL manner.
- To ensure a high degree of TRANSPARENCY in the conduct of business.
- To ensure INDEPENDENCE in operations and functioning of business.
- To PREVENT FRAUD.
- To ensure that the Board, and the management of the company are ACCOUNTABLE to all its stakeholders.
- To protect the interests of, and to ensure equitable and FAIR TREATMENT of, all the stakeholders (including shareholders) of a company.






Guardians (and Stakeholders) of Corporate Governance



Media Regulators

Board of Directors



Guardians of

Management



Trade Unions


Banks and

Vendors and
Suppliers

Shareholders (including institutional investors)

Corporate Governance Lenders Customers
Society

Employees Government


Board of Directors – What do they do?
What do Boards do?
- Boards provide SUPERINTENDENCE, DIRECTION and CONTROL.

What do Directors do?
- Executive Directors ensure that the company operates properly.
- Non-Executive Directors, as Board members ensure, SUPERINTENDENCE of, DIRECTION to, and CONTROL over,
management.



Challenges in Corporate Governance
- Too many provisions which are too prescriptive.

- Inconsistencies within laws.

- Governance considered a cost, and not an investment, by a company.

- Companies only tick boxes and do not follow Corporate Governance in spirit.



Corporate Governance - Best Practices
- Proper Composition of Board.

- Receptive and responsive Board.
- Transparency in communication with all stakeholders.
-
WITH A VIEW TO
- Protect stakeholders ’ interest.














BASIC Rule of Governance When in doubt, DISCLOSE