2. ► Do what you say...Say what you do.....!!
► Set of processes, customs, policies, laws, and
institutions affecting the way a corporation is
directed, administered or controlled
► Includes relationships among many stakeholders
involved and the goals for which corporation is governed
► Stakeholders types:
• External: Shareholders, debt
holders, trade creditors, suppliers, customers and
communities affected by the corporation's activities
• Internal: Board of directors, Executives, Employees
Thursday, December 01, 2011 The United States Corporate Governance Code 2
3. ► Managers did not hold shareholder interests as their
primary focus
► Corporate managements represented “the corporation”
rather than the share holders
► The goal of the firm not to maximize shareholder
wealth, but to ensure the growth (or at least the stability)
of the enterprise by “balancing” the claims of all
important corporate “stakeholders”
► Raiders and hostile takeovers were relatively uncommon
► Internal incentives from management ownership of stock
and options were also modest
Thursday, December 01, 2011 The United States Corporate Governance Code 3
4. ► Enron Scandal
► Dot Com Bubble
► Massive securities fraud and insider trading
► Unethical auditing processes
A failure of corporate governance ???
New rules, new games
Thursday, December 01, 2011 The United States Corporate Governance Code 4
5. ► Rights of Shareholders
► Insider trading laws
► Role of stake holders
► Disclosure and transparency
► The responsibilities of the board
Thursday, December 01, 2011 The United States Corporate Governance Code 5
6. ► Common stock gives voting rights
► Common stock holders have right of taking net residual
after liquidation
► Common stock can be traded adhering to SEC norms
irrespective of the persons in concern
► All stocks give right of registration as shareholders of the
company
► Voting can be in person or proxy
► For corporate equity securities, the shareholder registry
is kept by the issuer or an agent of the issuer (called a
"transfer agent") who affects transfers
Thursday, December 01, 2011 The United States Corporate Governance Code 6
7. ► Section 17(a) of the Securities Act,1933 prohibits
fraudulent practices with the offer or sale of any security
► SEC Rule 14e-3, under Section 14(e) of the Exchange
Act and Insider Trading Act,1984 (ITSA) permits the SEC
to bring suit against anyone violating the Exchange Act
by “trading a security while in possession of material
nonpublic information."
► ITSA provides for penalties of up to three times the
profits gained or loss avoided by the insider trading and
authorizes a criminal penalty for insider trading of up to
$100,000.
Thursday, December 01, 2011 The United States Corporate Governance Code 7
8. ► Stakeholders in a U.S. company may participate in
corporate governance as shareholders (employee stock
ownership plans) and through service as directors
► The rights of stakeholders are established by laws
- labor law
- contract law
- insolvency law
► If the rights as established by these laws are
violated, stakeholders can obtain effective redress
through the courts and, in some cases, administrative
agencies
Thursday, December 01, 2011 The United States Corporate Governance Code 8
9. All of the following information must be disclosed by
companies in the registration statements with the SEC
► The financial and operating results of the company
► Company objectives
► Major share ownership and voting rights
► Members of the board and key executives, and their
remuneration
► Material foreseeable risk factors
► Material issues regarding employees and other
stakeholders
► Governance structures and policies
Thursday, December 01, 2011 The United States Corporate Governance Code 9
10. ► Financials – as per US GAAP
► Mandatory disclosure of material non-financial
information (IOSCo)
► Auditor must be independent of the company and should
not have any business linkages or in an advisory position
or any financial interest in the company
► Audit committees to include at least three members and
be comprised solely of "independent" directors who are
financially literate
► At least one member of the audit committee to have
accounting or financial management expertise
Thursday, December 01, 2011 The United States Corporate Governance Code 10
11. ► A majority of independent directors
► Directors vacate their position on the board if their term
of appointment expires, they resign or are removed by
shareholders on a cause
► Vacancy is filled by vote of the board of directors, and
the new director stands for reelection at the next annual
meeting or when the term expires and a successor is
elected, whichever is later
► Directors set their own compensation unless restricted
by the corporation’s certificate of incorporation or bylaws
► Directors usually receive an annual fee or a per meeting
fee plus expenses for their service on the board
Thursday, December 01, 2011 The United States Corporate Governance Code 11
12. ► Most actions by the board are taken by majority vote at
formally noticed meetings
► Each director has one vote and is not allowed to vote by
proxy
► Under state law, directors of a corporation are deemed to
owe their corporations a fiduciary duty of care
► If any statement contains materially false or misleading
statements or omits statements SEC may also bring an
action against the directors and against the officers who
signed the statement, mostly debarring further
directorships
Thursday, December 01, 2011 The United States Corporate Governance Code 12
13. ► Known as "the unitary system”
► Emphasizes a single-tiered Board of Directors
► Composed of a mixture of executives from the company
and non-executive directors, all elected by shareholders
► Non-executive directors outnumber executive directors
and hold key posts in audit and compensation
committees
► The United States and the United Kingdom differ in one
critical respect with regard to corporate governance:
- In UK the CEO generally does not serve as Chairman
- In US having the dual role is the norm
Thursday, December 01, 2011 The United States Corporate Governance Code 13
14. ► In US, corporations are directly governed by state laws
► Exchange of securities is governed by federal legislation.
► Many U.S. states have adopted the Model Business
Corporation Act, but the dominant state law for publicly-
traded corporations is Delaware
► Individual rules for corporations are based upon the
corporate charter and the corporate bylaws
► Shareholders cannot initiate changes in the corporate
charter although they can initiate changes to the
corporate bylaws.
Thursday, December 01, 2011 The United States Corporate Governance Code 14
15. Ownership structure Dispersed
Individuals
Ownership identity
Pension and mutual funds
Changes in ownership Frequent
Shareholder value
Goals of ownership
Short-term profits
Executives
Board controlled by
Shareholders
Key stakeholders Shareholder
Thursday, December 01, 2011 The United States Corporate Governance Code 15
