A light explanation of Corporate Governance for those who want to have a quick understanding of the concept. This presentation was designed for a small team of mixed background individuals and enlightened them with the insight on the concept of Governance.

1. A BASIC UNDERSTANDING
Corporate Governance
By
Rajesh Kumar Iyer.A

2. Meaning
 Corporate:
 Of or shared by all the members of a group
 Govern
 conduct the policy, actions, and affairs

3. Definition of Corporate Governance
 Cadbury Committee 1992:
 the system by which companies are directed and
controlled"(Cadbury Committee, 1992)
 Organisation for Economic Co-operation and
Development (OECD)
 "Corporate governance involves a set of relationships
between a company’s management, its board, its
shareholders and other stakeholders. Corporate governance
also provides the structure through which the objectives of the
company are set, and the means of attaining those objectives
and monitoring performance are determined."

4. Shareholders vs Stakeholders
 Shareholder: Owners of the company
 Stakeholders include:
 External Financiers
 Employees
 Customers
 Suppliers
 Communities
 Governmental bodies
 Political groups
 Trade associations
 Trade unions

5. Need for Corporate Governance
 Changing ownership structure
 Importance of Social responsibility
 Growing number of scams
 Good corporate governance also minimizes wastages, corruption, risks
and mismanagement.
 Indifference on the part of shareholders
 Globalization
 Mergers and Takeovers
 Brand formation and development.

6. Principles of Corporate Governance
 Rights and equitable treatment of shareholders: Organizations
should respect the rights of shareholders and help shareholders to exercise
those rights.
 Interests of other stakeholders: Organizations should recognize that
they have legal, contractual, social, and market driven obligations to non-
shareholder stakeholders, including employees, investors, creditors,
suppliers, local communities, customers, and policy makers.
 Role and responsibilities of the board: The board needs sufficient
relevant skills and understanding to review and challenge management
performance. It also needs adequate size and appropriate levels of
independence and commitment.

7. Principles of Corporate Governance(contd.)
 Integrity and ethical behavior: Integrity should be a fundamental
requirement in choosing corporate officers and board members.
Organizations should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision making.
 Disclosure and transparency: Organizations should clarify and make
publicly known the roles and responsibilities of board and management to
provide stakeholders with a level of accountability.
 Financial Reporting: They should also implement procedures to
independently verify and safeguard the integrity of the company's financial
reporting.

8. Reasons for birth of modern day Corporate Governance in USA
 During the year 2000 to 2002, the United States of America
faced a market value decline of over USD 500 Billion.
 The analysis of the root causes of the decline revealed that the
due to the following main reasons, the Companies were unable to
exercise a proper control over their internal as well as external
performances:
 On behalf of the investors, the Board of Directors, especially the
Audit Committee is charged with the responsibility of establishing
oversight mechanisms for financial reporting. But in cases of
Companies such as Enron, WorldCom, etc., which were well known
for frauds and other financially unhealthy practices, it was noticed
that the Board Members were unable to understand the Business
complexities due to lack of expertise. In few cases, the Audit
Committee members were not truly independent of Management.

9. Reasons for birth of modern day Corporate Governance in
USA (contd.)
 In few companies, Auditors, who were supposed to be the concierge
(caretaker) for investors, performed momentous (significant) non-audit or
consulting work for the Companies they audited.
 Banking practices such as lending to a firm sends signals to investors
regarding the firm's risk. For example, several major banks provided large
loans to Enron without understanding the risks of the company. Investors of
these banks and their clients were hurt by such bad loans, resulting in large
settlement payments by the banks.
 Stock option and bonus practices, combined with volatility in stock prices for
even small earnings "misses," resulted in pressures to manage earnings.

10. Measures taken by OECD
 The OECD Principles of Corporate Governance (2004) describe the
responsibilities of the board; some of these are summarized below:
 Board members should be informed and act ethically and in good faith, with due
diligence and care, in the best interest of the company and the shareholders.
 Review and guide corporate strategy, objective setting, major plans of action, risk
policy, capital plans, and annual budgets.
 Oversee major acquisitions and divestitures.
 Select, compensate, monitor and replace key executives and oversee succession
planning.
 Align key executive and board remuneration (pay) with the longer-term interests
of the company and its shareholders.

11. Measures taken by OECD (contd.)
 Ensure a formal and transparent board member nomination and election
process.
 Ensure the integrity of the corporations accounting and financial reporting
systems, including their independent audit.
 Ensure appropriate systems of internal control are established.
 Oversee the process of disclosure and communications.
 Where committees of the board are established, their mandate, composition
and working procedures should be well-defined and disclosed.

12. Problems in Corporate Governance
 Demand for information: In order to influence the directors, the
shareholders must combine with others to form a voting group which
can pose a real threat of carrying resolutions or appointing directors
at a general meeting.
 Monitoring costs: A barrier to shareholders using good
information is the cost of processing it, especially to a small
shareholder.
 Supply of accounting information: Financial accounts form a
crucial link in enabling providers of finance to monitor directors.
Imperfections in the financial reporting process will cause
imperfections in the effectiveness of corporate governance. This
should, ideally, be corrected by the working of the external auditing
process.

13. Corporate Governance Code in Various Countries
 United Statement of America: Sarbanes Oxley Act 2002
 United Kingdom: UK Corporate Governance Code
 India: Clause 49 of the Listing Agreement
 Japan: Corporate Governance Code
 Australia: Guidance Note 9 of ASX Listing Rules

14. Corporate Social Responsibility
 A part of corporate governance
 A company’s sense of responsibility towards the community
and environment (both ecological and social) in which it
operates.
 Companies express this citizenship through their waste and
pollution reduction processes, by contributing educational and
social programs and by earning adequate returns on the
employed resources.

15. Just as one candle lights another
and can light thousands of other
candles, so one heart illuminates
another heart and can illuminate
thousands of other hearts
-Leo Tolstoy
THANK YOU