Corporate Governance - Term Report

1. CORPORATE GOVERNANCE | Karim Virani – Men 2201278

2. 2 CORPORATE GOVERNANCE | Karim Virani – Men 2201278
Contents
CORPORATE GOVERNANCE ....................................................................................................................3
OBJECTIVES OF CORPORATE GOVERNANCE.......................................................................................4
IMPORTANCE OF CORPORATE GOVERNANCE....................................................................................5
PARTIES TO CORPORATE GOVERNANCE.................................................................................................6
CONTROL AND OWNERSHIP STRUCTURES: ............................................................................................7
Family Control.....................................................................................................................................8
Diffuse Shareholders...........................................................................................................................8
MECHANISM AND CONTROL ..................................................................................................................9
INTERNAL CORPORATE GOVERNANCE CONTROLS.............................................................................9
EXTERNAL CORPORATE GOVERNANCE CONTROLS ..........................................................................10
FINANCIAL REPORTING AND THE INDEPENDENT AUDITOR: ................................................................11
SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE .........................................................................12
DEBATES IN CORPORATE GOVERNANCE...............................................................................................12
Executive Pay: ...................................................................................................................................12
Separation of CEO and Chairman of the board roles:.......................................................................13
A Recent Trend toward Separating the Roles of Board Chair and CEO............................................13
REFERENCES..........................................................................................................................................15

3. 3 CORPORATE GOVERNANCE | Karim Virani – Men 2201278
CORPORATE GOVERNANCE
Corporate governance is the set of processes, customs, policies, laws and institutions
affecting the way in which a corporation is directed, administered or controlled.
Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board,
managers, shareholders and other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs. By doing this, it also provides the structure through
which the company objectives are set, and the means of attaining those objectives and
monitoring performance", OECD April 1999. OECD's definition is consistent with the one
presented by Cadbury
Corporate governance also includes the relationships among the many players involved and
the goals for which the corporation is governed. The principal players are the shareholders,
management and the board of directors. Other stakeholders include employees, suppliers,
customers, banks and other lenders, regulators, the environment and the community at
large.
The term corporate governance has come to mean 2 things:
 The processes by which all companies are directed and controlled.
 A field in economics, which studies the many issues arising from the separation of
ownership and control.
FACTORS INFLUENCING:
 The ownership structure of a corporation
 Its financial structure
 The structure and functioning of the company boards
 The legal, political and regulatory environment within which the company operates
Corporate governance mechanisms and controls are designed to reduce the inefficiencies
that arise from moral hazard and adverse selection.
For example,
To monitor managers' behavior, an independent third party (the auditor) attests the
accuracy of information provided by management to investors. An ideal control system
should regulate both motivation and ability.

4. 4 CORPORATE GOVERNANCE | Karim Virani – Men 2201278
OBJECTIVES OF CORPORATE GOVERNANCE
The fundamental objective of corporate governance is to enhance shareholders' value and
protect the interests of other stakeholders by improving the corporate performance and
accountability. Hence it harmonizes the need for a company to strike a balance at all times
between the need to enhance shareholders' wealth whilst not in any way being detrimental
to the interests of the other stakeholders in the company. Further, its objective is to
generate an environment of trust and confidence amongst those having competing and
conflicting interests.
It is integral to the very existence of a company and strengthens investor's confidence by
ensuring company's commitment to higher growth and profits. Broadly, it seeks to achieve
the following objectives:
 A properly structured board capable of taking independent and objective decisions is
in place at the helm of affairs;
 The board is balance as regards the representation of adequate number of non-
executive and independent directors who will take care of their interests and well-
being of all the stakeholders;
 The board adopts transparent procedures and practices and arrives at decisions on
the strength of adequate information;
 The board has an effective machinery to sub serve the concerns of stakeholders;
 The board keeps the shareholders informed of relevant developments impacting the
company;
 The board effectively and regularly monitors the functioning of the management
team;
The board remains in effective control of the affairs of the company at all times.
The overall endeavor of the board should be to take the organization forward so as to
maximize long term value and shareholders' wealth.
The aim of Good Corporate Governance is to ensure commitment of the board in managing
the company in a transparent manner for maximizing long-term value of the company for its
shareholders and all other partners. It integrates all the participants involved in a process,
which is economic, and at the same time social.

5. 5 | Karim Virani – Men 2201278
Parties to
Corporate
Governance
Employees
Government
Creditor
Shareholders
Board of
Directors
Vendors
IMPORTANCE OF CORPORATE GOVERNANCE
Corporate governance is an important aspect of business. If you’ve ever wanted to create a
business, then it’s important to explore the importance of corporate governance and how it
can help your company. There’s a lot that goes into running a business obviously, and
understanding things like corporate governance is only one small part of the big picture.
It helps streamline the process and gives people accountability. The point of corporate
governance is to help the decision making process. One of the main goals is to clearly
explain to the board, the stakeholders, and the shareholders what their duties and
responsibilities are within the company.
With knowing those roles and responsibilities, the people within the corporation can
understand what they are held accountable for. For example, the board has the
responsibility of properly evaluating the management in the company. If the company has
poor management, then it is the fault of the board for not properly evaluating the manager.
In this regard, the blame cannot be placed on other members of the corporation. This
prevents situations in which there is no way to know who is accountable for what action.
Accountability is what helps people within the company make decisions, whether it is
finding out what person should be terminated from their position due to the mistakes that
they’ve made or who should be acknowledged for their good work due to doing something
exceptional in their field. With good corporate governance, it’s pretty simple to know what
the key members of the business are supposed to do.

6. 6 PARTIES TO CORPORATE GOVERNANCE | Karim Virani – Men 2201278
PARTIES TO CORPORATE GOVERNANCE
The most influential parties involved in corporate governance include government agencies
and authorities, stock exchanges, management (including the board of directors and its
chair, the Chief Executive Officer or the equivalent, other executives and line
management, shareholders and auditors). Other influential stakeholders may include
lenders, suppliers, employees, creditors, customers and the community at large.
The agency view of the corporation posits that the shareholder forgoes decision rights
(control) and entrusts the manager to act in the shareholders' best (joint) interests. Partly as
a result of this separation between the two investors and managers, corporate governance
mechanisms include a system of controls intended to help align managers' incentives with
those of shareholders. Agency concerns (risk) are necessarily lower for a controlling
shareholder.
A board of directors is expected to play a key role in corporate governance. The board has
the responsibility of endorsing the organization's strategy, developing directional policy,
appointing, supervising and remunerating senior executives, and ensuring accountability of
the organization to its investors and authorities.
All parties to corporate governance have an interest, whether direct or indirect, in the
financial performance of the corporation. Directors, workers and management receive
salaries, benefits and reputation, while investors expect to receive financial returns. For
lenders, it is specified interest payments while returns to equity investors arise from
dividend distributions or capital gains on their stock. Customers are concerned with the
certainty of the provision of goods and services of an appropriate quality; suppliers are
concerned with compensation for their goods or services, and possible continued trading
relationships. These parties provide value to the corporation in the form of financial,
physical, human and other forms of capital. Many parties may also be concerned with
corporate social performance.
A key factor in a party's decision to participate in or engage with a corporation is their
confidence that the corporation will deliver the party's expected outcomes. When
categories of parties (stakeholders) do not have sufficient confidence that a corporation is
being controlled and directed in a manner consistent with their desired outcomes, they are
less likely to engage with the corporation. When this becomes an endemic system feature,
the loss of confidence and participation in markets may affect many other stakeholders, and
increases the likelihood of political action.

7. 7 CONTROL AND OWNERSHIP STRUCTURES: | Karim Virani – Men 2201278
CONTROL AND OWNERSHIP STRUCTURES:
Control and possession construction alludes to the kinds and constitution of stockholders
within a company. In a few nations such like nearly all of Continental Europe, possession is
not inevitably equal to command expected to the being of e.g. ‘dual-class shares’,
‘ownership pyramids’, ‘voting coalitions’, ‘proxy votes’ and ‘clauses in the items of alliance
that confer extra polling claims to lasting shareholders’
Ownership is characteristically described like the possession of hard cash stream claims
while command alludes to possession of command either polling claims. Researchers
frequently amount command and possession constructions by utilizing a few noticeable
actions of command and possession absorption either the degree of inner command and
possession. Some features either kinds of command and possession construction including
business groupings contains pyramids, cross ownership/cross-shareholdings, circles, and
webs. German bothers (Konzern) are legal acknowledged business groupings with
compound constructions. Japanese keiretsu (??) and South Korean chaebol (which incline to
be family-controlled) are business groupings that comprise of compound interlocking trade
connections and shareholdings. Cross-shareholding is a necessary feature of keiretsu and
chaebol grouping.
 Dual Class Stocks
Dual class stock is intended to give specific shareholders voting control. Well-known
companies such as Ford and Warren Buffett's Berkshire Hathaway have dual class stock
structures that provide founders, executives and family the ability to control the majority
shareholder voting power with a relatively small amount of total equity in the company. The
dual class structure at Ford, for example, gives the Ford family control of 40% of the voting
power while owning only about 4% of the company's total equity.
Dual class stock structures are controversial. Supporters feel that the structure allows strong
leadership to put long-term interests first while seeing beyond the near-term financial
situation. Opponents of dual class structures feel it allows a small group of privileged
shareholders to maintain control while other shareholders (with less voting power) provide
the majority of the capital.
 Ownership Pyramid
Pyramidal ownership structure is defined as an entity whose ownership structure displays a
top-down chain of control. In such a structure, the ultimate owners are located at the apex
and what follows below are successive layers of firms. A direct result of this pyramidal
ownership structure is a separation of actual ownership and control in firms located at the
lower part of the pyramid structure

8. 8 CONTROL AND OWNERSHIP STRUCTURES: | Karim Virani – Men 2201278
The separation of actual ownership and control occurs because the pyramid structure
enables the ultimate owners to establish control disproportionately to the amount of
ownership he has in every one of the successive firms. With such a pyramid structure, the
UO’s actual ownership becomes smaller relative to control farther down in the pyramid
structure and this evidently has some negative implications.
 Voting Coalitions
A voting coalition or voting pool consists of several shareholders agreeing to vote in the
same way. In practice, voting coalitions are rare, especially those that persist in the long
term. One reason for the infrequency of voting coalitions may be the costs imposed by
regulation.
 Proxy Voting
A ballot cast by one person on behalf of another. One of the benefits of being a shareholder
is the right to vote on on certain corporate matters. Since most shareholders cannot or do
not want to attend the annual and special meetings at which the voting occurs, corporations
provide shareholders with the option to cast a proxy vote. Shareholders receive a proxy
ballot in the mail along with an informational booklet called a proxy statement describing
the issues to be voted on. Shareholders return a form by mail agreeing to have their vote
cast by proxy. Issues commonly decided by proxy vote include electing directors to the
board, approving a merger or acquisition, and approving a stock compensation plan.
Family Control
Family concerns control possession and command constructions of a few organizations, and
it has been proposed the omission of kin managed company is senior to that of
organizations managed by institutional financiers (or with such varied share possession that
they are managed by management). A new research by Credit Suisse noticed that
businesses in that establishing relatives keep a interest of further compared to 10% of the
organization’s assets relished a senior execution over their individual sectorial peers. Since
1996, this senior execution sums to 8% per annum.
Diffuse Shareholders
The importance of institutional financiers differs considerably athwart nations. In
elaborated Anglo-American nations (Australia, Canada, New Zealand, U.K., U.S.),
institutional financiers control the trade for stocks in greater organizations. While
the major part of the parts in the Japanese trade are grasped by monetary
businesses and manufacturing organizations, those are not institutional financiers
if their possessions are mostly with-on cluster. The greatest pools of capitalized
cash (such as the reciprocal finance ‘Vanguard 500′, either the greatest speculation

9. 9 MECHANISM AND CONTROL | Karim Virani – Men 2201278
administration firm for organizations, State Street Corp.) are developed to exploit
the advantages of varied speculation by infusing in a real great numeral of
dissimilar organizations with adequate liquidity. The thought is this plan of action
must mostly remove single firm monetary risk/financial either different hazard
and. A result of this tactic is that those financiers have comparatively itty-bitty
attention in the manner of government of a specific company. It is frequently
presumed that, if institutional financiers pushing for must probably be expensive
since of made of gold handshakes either the attempt needed, they tend to plainly
vend out their attention.
MECHANISM AND CONTROL
Corporate manner of government systems and powers are developed to lessen the
incompetency’s that emerge as of meaning hazard and unfavorable choice. There are either
interior tracking setups or outside tracking setups. Internal tracking may be completed, for
instance, by one (or a few) great shareholder(s) in the situation of confidentially grasped
businesses either a firm belonging to a trade cluster. Furthermore, the different board
systems supply for interior tracking. External tracking of managers’ conduct happens once
an autonomous 3rd party (e.g. the outside auditor) attests the precision of data presented
by administration to financiers. Stock experts and arrearage bearers might as well doings
such outside tracking. A standard tracking and command configuration ought to control
either incentive or capacity, when delivering inducement orientation towards business
objectives and aims. Care ought to be taken that inducements are not thus forceful that a
few single human beings are enticed to cross rules of moral conduct, for instance by
controlling income and yield numbers to drive the share cost of the corporation up.
INTERNAL CORPORATE GOVERNANCE CONTROLS
Internal corporate governance controls (internal controls) play a vital role in ensuring the
success of a business organization and preventing corporate fraud.
Internal control activities that ensure proper corporate governance include:
 Monitoring by board
 Internal audits and robust policies
 Proper balance of power
 Performance based remuneration
 Monitoring by large shareholders and other stakeholders
Monitoring by board: The board should monitor the corporate governance of the company
through continuous review of its internal structure. This ensures that there are clear lines of
accountability for management throughout the company.

10. 10 MECHANISM AND CONTROL | Karim Virani – Men 2201278
The board should also monitor and review:
 Corporate strategy
 Major plans of action
 Risk policy
 Annual budgets and business plans
 Corporate performance
 major capital expenditures, acquisitions and divestitures
 governance practices and changes
 selection, compensation and succession planning of executives
 key executive and board remuneration
Internal audits and robust policies: Regular internal audits have to be carried out by
auditors employed by the organization in order to assess the health of governance
processes, operational health and financial reporting.
Robust internal control policies should also be implemented to ensure that the company
lives up to its obligations to investors, stakeholders, employees, the environment, the
government and the public at large.
Proper balance of power: A separation of powers and responsibilities between
management groups ensures that there’s a proper system of checks and balances in place,
with one group implementing policies and another ensuring that these are implemented
and functioning in the right manner.
Performance based remuneration: Executive pay, a contentious topic following the 2007-08
financial crises, is expected to be linked to performance in order to ensure that
management is rewarded for operating the company keeping in mind the rights of investors
and other stakeholders.
Monitoring by large shareholders and other stakeholders: Individuals and institutions that
have large shareholdings (and financial institutions such as banks who are creditors) have
the right to monitor the performance of the management, acting as an effective internal
control measure.
EXTERNAL CORPORATE GOVERNANCE CONTROLS
External stakeholders play an important role in ensuring proper corporate governance
processes in a business organization. Some of the key external corporate governance
controls include:
 Government regulations
 Media exposure
 Market competition
 Takeover activities
 Public release and assessment of financial statements

11. 11 FINANCIAL REPORTING AND THE INDEPENDENT AUDITOR: | Karim Virani – Men 2201278
Government regulations: Government regulations are the most effective external controls
on the governance of a company. Companies are required to comply with these or face
penalties for violations.
Most corporate governance regulatory requirements are based on the OECD Principles of
Corporate Governance.
Media exposure: Media scrutiny of the workings and processes of a company ensures, to a
certain degree, the proper governance in an organization. Whistleblowers often expose
wrongdoing within a company to the government and media organizations.
Market competition: Companies with the best corporate governance practices have the
best standing in the market. Reputation, credibility and positive public perception all play a
vital role in boosting a company’s image and thus help it trump its competition and best its
peers.
Takeover activities: Takeover activities lay a company’s internal processes and workings
open to public scrutiny. Both government regulators and the media will focus on the
internal policies and governance structures, thus acting as an effective external control.
Public release and assessment of financial statements: The public release of financial
statements by listed companies exposes them open to assessment or scrutiny by regulators,
investors, members of the public and so on. This acts as an external control as companies
have to be scrupulous and careful about the details included in these statements and in
ensuring that they are properly prepared and audited.
FINANCIAL REPORTING AND THE INDEPENDENT AUDITOR:
The board of executives has main obligation for the corporation’s outside monetary
informing purposes. The Chief Executive Officer and Chief Financial Officer are vital
contributors and boards normally have a elevated level of dependence on them for the
stability and provision of bookkeeping data. They supervise the interior bookkeeping setups,
and are reliant on the corporation’s Accountants and interior assessors.
Current bookkeeping commands under International Accounting Standards and U.S. GAAP
permit administrators a few options in deciding the techniques of quantification and
standards for acknowledgment of different monetary informing components. The
prospective activity of this option to better obvious execution (see originative bookkeeping
and incomes management) upsurges the data hazard for consumers. Financial informing
fraudulence, containing non-disclosure and intentional falsehood of principles as well gives
to users’ data hazard. To lessen this hazard and to intensify the detected stability of
monetary outlines, company monetary outlines should be reviewed by an autonomous
outside assessor whoever subjects a outline that goes with the monetary declarations (see
monetary audit).

12. 12 SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE | Karim Virani – Men 2201278
One zone of concern is if the inspecting firm acts as either the autonomous assessor and
administration adviser to the firm they are inspecting. This might effect in a clash of
attention that places the stability of monetary outlines in distrust expected to customer
force to assuage administration. The power of the business customer to begin and end
administration advising facilities and, further basically, to choose and disband bookkeeping
businesses contradicts the idea of an autonomous assessor. Changes enacted in the United
States in the shape of the Sarbanes-Oxley Act (following countless business scandals,
climaxing with the Enron scandal) forbid bookkeeping businesses as of delivering either
inspecting and administration advising facilities.
SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE
 Demand for information: In line to impact the directors, the stockholders should roll
into one with other ones to shape a polling cluster that may pose a actual menace of
bearing intentions either designating directors at a common gathering.
 Monitoring costs: A obstacle to stockholders utilizing high-quality data is the outlay
of handling it, particularly to a not so large stockholder. The customary reply to this
difficulty is the effectual trade theory (in funding, the effectual trade theory (EMH)
asserts that monetary marketplaces are efficient), that proposes that the not so
large stockholder must gratis ride on the discernments of greater non-amateur
financiers.
 Supply of bookkeeping information: Financial accounts shape a vital link in activating
suppliers of funding to screen directors. Imperfections in the monetary informing
procedure tend to trigger imperfections in the success of business manner of
government. This ought to, in an ideal world, be rectified by the functioning of the
outside inspecting procedure.
DEBATES IN CORPORATE GOVERNANCE
Executive Pay:
Increasing awareness and rule (as under the Swiss vote opposed to business Rip-offs of
2013) has been accompanied to head reward degrees eversince the monetary catastrophes
of 2007–2008. Research on the connection amid firm execution and head recompense does
not recognize coherent and important connections amid executives’ payment and firm
execution. Not altogether businesses encounter the similar degrees of organization clash,
and outside and interior tracking implements might be further effectual for a few compared
to for other ones. Some experimenters have noticed that the greatest CEO execution
inducements appeared as of possession of the firm’s parts, when additional experimenters
noticed that the connection amid share possession and firm execution was reliant on the
layer of possession. The outcomes propose that upsurges in possession overhead 20%

13. 13 DEBATES IN CORPORATE GOVERNANCE | Karim Virani – Men 2201278
trigger administration to come to be further entrenched, and fewer engrossed in the well-
being of their stockholders.
Some reason that company execution is definitely related with share Option (finance
|option designs and that those designs straight managers’ energies and expand their
resolution horizons towards the lasting, somewhat compared to the Short-term, execution
of the corporation.
Even beforehand the pessimistic impact on common view triggered by the 2006 backdating
disgrace, employ of choices fronted different disapprovals. A especially powerful and
prolonged operating argumentation worried the communication of head choices with
business merchandise repurchase programs. Numerous powers (including U.S. Federal
Reserve Board economic expert Weisbenner) intended choices might be engaged in musical
performance with merchandise buybacks in a way opposite to stockholder concerns. These
writers asserted that, in piece, business merchandise buybacks for U.S. Standard Poor’s 500
businesses surged to a $500 billion yearly charge in belated 2006 since of the influence of
choices.
An amalgamation of bookkeeping amends and manner of government subjects guided
choices to come to be a fewer well-liked intents of payment as 2006 advanced, and different
alternate executions of buybacks emerged to dare the supremacy of open trade hard cash
buybacks as the favored intents of executing a share repurchase design.
Separation of CEO and Chairman of the board roles:
Since the early 1980s, much attention has been paid to corporate boards of directors and
how their structures improve (or undermine) organizational performance. Among the most
hotly debated structural features of the board is the combination (or separation) of the
chair and CEO roles. As of February 2010, Securities and Exchange Commission (SEC) rules
require listed companies to disclose their board leadership structure and explain why they
have determined that such a leadership structure is appropriate, given their specific
characteristics or circumstances.
A Recent Trend toward Separating the Roles of Board Chair and CEO
When, as after the recent financial crisis, public corporations come under fire from activist
shareholders, institutional investors, proxy advisory firms, and regulators, the issue of
separating the chair/CEOs roles is often front and center, with a view to achieving
independent leadership on the board. Both academic papers and practitioner-oriented
literature routinely call for separation of the chair and CEO roles, as do a variety of best
practice codes and guidelines. Some corporate leaders and associations, however, have
responded to the debate about the pros and cons of role separation, often resisting a
mandated separation or a “one size fits all” approach.
In the most common argument based on agency theory, the separation of the chair and CEO
roles increases the board’s independence from management and thus leads to better

14. 14 DEBATES IN CORPORATE GOVERNANCE | Karim Virani – Men 2201278
monitoring and oversight. Because the CEO manages the company and the chair leads the
board in overseeing (hiring, compensating, and replacing as necessary) the CEO on behalf of
shareholders, holders of this view see a conflict of interest if one person occupies both the
CEO and chair roles.
In contrast, stewardship or administrative theory suggests that the benefits of separating
the chair and CEO roles are not so clear-cut. Stewardship theory is based on the principle of
“unity of command” and argues that having clear and unambiguous authority concentrated
in one person is essential to effective management. Unity of command creates clear lines of
authority to which management (and the board) can respond more effectively. In an
environment where strong, directive, stable, and unconfused leadership is seen as critical to
organizational success, this kind of legitimacy is an important signal to stakeholders about
who is accountable.

15. 15 REFERENCES | Karim Virani – Men 2201278
REFERENCES
http://clone2.theartofservice.com/?s=separation+of+cheif+executive+officer
http://blogs.law.harvard.edu/corpgov/2011/09/01/separation-of-chair-and-ceo-roles/
http://www.complianceonline.com/dictionary/External_Corporate_Governance_Controls.ht
ml
http://www.investopedia.com/terms/d/dualclassstock.asp