CG & CSR ( Over all Concepts)

1. CG & CSR ( Over all Concepts) M.R.Vanithamani Asst . Professor School of Management VLBJCET M.R.Vanithamani , AP, SOM, VLBJCET

2. SomeDefinitions • “Corporate Governance is the system by which companies are directed and controlled…” • Cadbury Report (UK), 1992 • “…to do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.” • Sir Adrian Cadbury. M.R.Vanithamani , AP, SOM, VLBJCET

3. An OECD Definition • “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders ..also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” • Preamble to the OECD Principles of Corporate Governance, 2004 M.R.Vanithamani , AP, SOM, VLBJCET

4. What is Corporate Governance? • The Manner in which a Corporation is Run • Achieving its Objectives • Transparency of its Operations • Accountability & Reporting • Good Corporate Citizenship • The Processes & Operating Relationships that Best Achieve Organisational Goals M.R.Vanithamani , AP, SOM, VLBJCET

5. CORPORATE GOVERNANCE • WHAT IS CORPORATE GOVERNANCE – Processes And Structure By Which Business And Affairs Of Corporate Sector Is Directed And Managed • OBJECTIVE OF CORPORATE GOVERNANCE a) To build up an environment of trust and confidence amongst those having competing and conflicting interest B) To enhance shareholders’ value and protect the interest of other stakeholders by enhancing the corporate performance and accountability M.R.Vanithamani , AP, SOM, VLBJCET

6. Some Governance Models • Finance or the Principal-Agent Model • Markets for Capital, Managerial Talent and Corporate Control, Key determinant • In general, profit-maximisation goal is co-functional with social-welfare-maximisation • Shareholders as Residual Claimants have superior control rights M.R.Vanithamani , AP, SOM, VLBJCET

7. Exclusive Accountability toShareholders • Risk-bearing Entrepreneurs • Residual Claimants • Winding-up Ranking: Last in Pecking Order • Boards Appointed by Shareholders • Non-congruence of Stakeholder Interests M.R.Vanithamani , AP, SOM, VLBJCET

8. The Stakeholder Case • Firm Objective must be defined more widely than just shareholder-value-maximisation, since risk capital is not the only, or even the major input • Residual Claimant Rights Not Universally Valid, eg, Circumscribed in case of pre-bankruptcy (US Chapter XI) Situations • Other Such: Employees with Firm-specific Specialised Skills, Customers/Vendors with Substantial Stake in the Business, etc M.R.Vanithamani , AP, SOM, VLBJCET

9. The Corporate Board • Central to Corporate Governance • Juxtaposed between Shareholders on the one hand, and on the other, Managers of the Entity (Cadbury) • Follows Distancing between Ownership and Control (Berle and Means) • Trustee for All Shareholders • Loyalty & Commitment – Always to Company M.R.Vanithamani, Assistant Professor, School of Management, VLBJCET M.R.Vanithamani , AP, SOM, VLBJCET

10. Board Role & Responsibility • Provide/ Exercise • Leadership and Strategic Guidance • Objective Judgement Independent of Management • Control over the Company • Direct and Control the Management of the Company • Be Accountable at all times to All Shareholders M.R.Vanithamani , AP, SOM, VLBJCET

11. Dimensions of Board Responsibility • Direction involves • Formulation & Review of Company Policies, Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc • Setting Objectives & Monitoring Performance • Oversight of Acquisitions, Divestitures, Projects, Financial and Legal Compliance, etc M.R.Vanithamani , AP, SOM, VLBJCET

12. Dimensions of Board Responsibility • Control Involves • Prescribing Codes of Conduct, • Overseeing Disclosure & Communication Processes, • Ensuring Control Systems to Protect Company Assets • Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives M.R.Vanithamani , AP, SOM, VLBJCET

13. Dimensions of Board Responsibility • Accountability Involves • Creating, Protecting and Enhancing Company Wealth and Resources • Timely and Transparent Reporting • Good Corporate Citizenry including Discharge of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal M.R.Vanithamani , AP, SOM, VLBJCET

14. Corporate Governance & Capital Market Drivers: A Conceptual Framework REGULATION & LEGISLATION Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements Listed Corporations (The Board & the Executive) Shareholders/ Stakeholders Lenders (Banks/ Depositors) Market Operators Institutional Investors Press/Media (Rewards) (Pension Funds/Insce Cos) (Opinion Makers) Market Operations, Critique & Monitoring M.R.Vanithamani , AP, SOM, VLBJCET

15. An Enterprise’s Triple Effect on Society Sustainable Development Equal Opportunities Waste Control Education & Culture Social Emissions Community Regeneration Environment Business Impact Energy Use Human Rights Product Employee Life-cycle Volunteers Economic Product Wealth Productive Ethical Value Generation Employment Trading M.R.Vanithamani , AP, SOM, VLBJCET

16. The Triple-Bottomline Impact economics Business Impact environment society M.R.Vanithamani , AP, SOM, VLBJCET

17. Governance Orientation Matrix M.R.Vanithamani , AP, SOM, VLBJCET

18. Governance Orientation & Sustainable Profits M.R.Vanithamani , AP, SOM, VLBJCET

19. Attributes & Responsibilities of Boards &Directors • Assume Responsibility for Effective & Efficient Management, through Oversight Mechanisms • Integrity is Indivisible; Role Model Director is the Most Persuasive Statement of Ethical values • Consider Transparency as the Norm. Confidentiality should not lead to Opacity • Ultimate Responsibility for True and Fair Presentation Rests with the Board • Poor Leadership Infects M.R.Vanithamani , AP, SOM, VLBJCET

20. RECENT DEVELOPMENTS • Committee headed by Shri Naresh Chandra constituted in august 2002 to examine corporate audit, role of auditors, relationship of company & auditor • Recommendation of Naresh Chandra committee: • Recommended a list of disqualifications for audit assignments like direct relationship with company, any business relationship with client, personal relationship with director • Audit firms not to provide services such as accounting, internal audit assignments etc. To audit clients • Auditor to disclose contingent liabilities & highlight Significant accounting policies. M.R.Vanithamani , AP, SOM, VLBJCET

21. RECENT DEVELOPMENTS • Recommendation of Naresh Chandra committee: • Audit committee to be first point of reference for appointment of auditors • CEO & CFO of listed company to certify on fairness, correctness of annual audited accounts • Redefinition of independent directors – does not have any material, pecuniary relationship or transaction with the company • Composition of board of directors • Statutory limit on the sitting fee to non-executive directors to be reviewed • Recommendations have formed part of companies (amendment) bill, 2003 (yet to be passed) M.R.Vanithamani , AP, SOM, VLBJCET M.R.Vanithamani, Assistant Professor, School of Management, VLBJCET

22. RECENT DEVELOPMENTS • Sebi constituted a committee headed by shri N. R. Narayana Murthy to review existing code of corporate governance • Recommendations: • Strengthening the responsibilities of audit committee • Improving quality of financial disclosures • Utilization of proceeds from IPO • To assess & disclose business risks • Formal code of conduct for board • Whistle blower policy to be placed in a company providing freedom to approach the audit committee • Subsidiaries to be reviewed by audit committee of holding company M.R.Vanithamani , AP, SOM, VLBJCET M.R.Vanithamani, Assistant Professor, School of Management, VLBJCET

23. CG Systems / Models • Anglo – American Model (or) Unitary Board Model (or) Anglo- Saxon Approach • German Model (or) Toe-tier Board Model (or) Continental European Approach • Japanese model (or) Business Network Model • Indian Model M.R.Vanithamani , AP, SOM, VLBJCET

24. Anglo – American Model (or) Unitary Board Model Elect BOD Shareholders Shareholders Appoints & Supervises Officers/ Managers Manage Shareholders Monitors & Regulates Lies on Creditors Company Stake in M.R.Vanithamani , AP, SOM, VLBJCET Own

25. Anglo – American Model (or) Unitary Board Model • Ownership is equally divided between individual & institutional stakeholders. • Directors are rarely independent of management • Companies are run by professional managers who have negligible ownership stakes. • Investors are reluctant activists • Discourages large investors from taking active role in CG. M.R.Vanithamani , AP, SOM, VLBJCET

26. German Model (or) Toe-tier Board Model Appoints 50%C Appoints 50%C Supervisory Board Appoints & Supervises Management Board (Including Labour Relation Officer) Shareholders Employees & Labour Unions Manage Company Own M.R.Vanithamani , AP, SOM, VLBJCET

27. German Model (or) Toe-tier Board Model • CG is exercised through 2 boards • The upper board supervises the executive board on behalf of the stakeholders. • Societal –oriented approach • Ensures employees & Labourers also enjoy a share in governance. • Supervisory board appoints & monitors management board. • MB independently conducts day to day operations. M.R.Vanithamani , AP, SOM, VLBJCET

28. Japanese model (or) Business Network Model Appoint Supervisory Board Ratifies the President’s Decision President Consults Main Bank Shareholders Executive Management Manage Provides Loans Company Own Owns M.R.Vanithamani , AP, SOM, VLBJCET

29. Japanese model (or) Business Network Model • Boards tends to be large • Power is based on the relationship between the top management and the network • Lending banks are given a role in CG • The main bankers & shareholders together appoints BODs • President consults supervisory board & excutive management. M.R.Vanithamani , AP, SOM, VLBJCET

30. Indian Model of CG Internal Environment Govt Regulations, Policies External Environment Corporate Culture, structure, influences Internal Environment Vision, mission, policies Depositors, borrowers, customers & stakeholders Companies Act, SEBI, Stock Exchange SH Auditors BOD CG System Shareholders Value Proper Governance CG outcomes / Benefits to the society Investor Protection Concern for customers Healthy corporate sector development M.R.Vanithamani , AP, SOM, VLBJCET

31. Indian Model of CG • Governed by Company’s Act-1956 • Follows more or less the UK model • Private companies are dominated by the founder & his family members. M.R.Vanithamani , AP, SOM, VLBJCET

32. Theories of Corporate Governance Agency Theory Stewardship Theory Corporate governance Stakeholder Theory Transaction Cost Economics M.R.Vanithamani , AP, SOM, VLBJCET

33. Agency theory • Identifies relationship between Principal & Agent • Principal delegates work to agents • Owners are the Principal & Directors are the Agents • BOD should act as monitoring device by ensuring that the problems arise out of P-A relationship are minimised. M.R.Vanithamani , AP, SOM, VLBJCET

34. Transaction Cost Economics • Views the firm as governance structure. • Choice of appropriate governance structure aligns the interest of directors & Shareholders. • There are certain economic benefits to the firm itself to undertake transactions internally rather than externally. M.R.Vanithamani , AP, SOM, VLBJCET

35. CG Systems / Models • Anglo – American Model (or) Unitary Board Model (or) Anglo- Saxon Approach • German Model (or) Toe-tier Board Model (or) Continental European Approach • Japanese model (or) Business Network Model • Indian Model M.R.Vanithamani , AP, SOM, VLBJCET

36. Anglo – American Model (or) Unitary Board Model Elect BOD Shareholders Shareholders Appoints & Supervises Officers/ Managers Manage Shareholders Monitors & Regulates Lies on Creditors Company Stake in M.R.Vanithamani , AP, SOM, VLBJCET Own

37. Anglo – American Model (or) Unitary Board Model • Ownership is equally divided between individual & institutional stakeholders. • Directors are rarely independent of management • Companies are run by professional managers who have negligible ownership stakes. • Investors are reluctant activists • Discourages large investors from taking active role in CG. M.R.Vanithamani , AP, SOM, VLBJCET

38. German Model (or) Toe-tier Board Model Appoints 50%C Appoints 50%C Supervisory Board Appoints & Supervises Management Board (Including Labour Relation Officer) Shareholders Employees & Labour Unions Manage Company Own M.R.Vanithamani , AP, SOM, VLBJCET

39. German Model (or) Toe-tier Board Model • CG is exercised through 2 boards • The upper board supervises the executive board on behalf of the stakeholders. • Societal –oriented approach • Ensures employees & Labourers also enjoy a share in governance. • Supervisory board appoints & monitors management board. • MB independently conducts day to day operations. M.R.Vanithamani , AP, SOM, VLBJCET

40. Japanese model (or) Business Network Model Appoint Supervisory Board Ratifies the President’s Decision President Consults Main Bank Shareholders Executive Management Manage Provides Loans Company Own Owns M.R.Vanithamani , AP, SOM, VLBJCET

41. Japanese model (or) Business Network Model • Boards tends to be large • Power is based on the relationship between the top management and the network • Lending banks are given a role in CG • The main bankers & shareholders together appoints BODs • President consults supervisory board & excutive management. M.R.Vanithamani , AP, SOM, VLBJCET

42. Indian Model of CG Internal Environment Govt Regulations, Policies External Environment Corporate Culture, structure, influences Internal Environment Vision, mission, policies Depositors, borrowers, customers & stakeholders Companies Act, SEBI, Stock Exchange SH Auditors BOD CG System Shareholders Value Proper Governance CG outcomes / Benefits to the society Investor Protection Concern for customers Healthy corporate sector development M.R.Vanithamani , AP, SOM, VLBJCET

43. Indian Model of CG • Governed by Company’s Act-1956 • Follows more or less the UK model • Private companies are dominated by the founder & his family members. M.R.Vanithamani , AP, SOM, VLBJCET

44. Sir Adrian Cadbury’s Definition of Corporate Governance • “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals.The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.The aim is to align as nearly as possible the interests of individuals,corporations and society.” M.R.Vanithamani , AP, SOM, VLBJCET

45. HISTORY OF CORPORATE GOVERNANCE • Ever since the concept of corporate entity was recognized, corporate governance in various in various manifestations has been in existence. • Efforts to articulate standards for corporate governance took roots in countries like the US and the UK. As a fall out of 1997 economic and financial crisis, Asian countries too became keenly interested in the issue of corporate governance. The OECD countries took early initiatives to address governance issues. • Despite various attempts to define corporate governance and, its elements, and suggesting a model of good corporate governance, no universally accepts model of good corporate governance exists. M.R.Vanithamani , AP, SOM, VLBJCET

46. HISTORY OF INDIAN CORPORATE GOVERNANCE • Recommendations of the Kumar Mangalam Birla Committee Constituted by SEBI and the Naresh Chandra Committee, led to addition and updating of clause 49 in the listing agreement. Compliance of provisions of clause 49 is largely mandatory by listed companies though it has some non – mandatory provisions also. • SEBI has undertaken a project for rating the good corporate governance practices of listed companies. There has been little progress in this direction. M.R.Vanithamani , AP, SOM, VLBJCET

47. Principles of Governance Transparency Value creation • Four board ideals, which should be the guiding force of company’s philosophy on corporate governance. • Purpose of setting out philosophy on corporate governance is to reflect Board’s commitment to adoption of good governance practice as part of the company’s corporate culture / life apart from complying with regulatory requirements. • It is a kind of self disciplinary code designed to secure the ultimate goal of making the company a value driven organization. Accountability Disclosure M.R.Vanithamani , AP, SOM, VLBJCET

48. ROLE OF CONSTITUENTS OF CORPORATE GOVERNANCE • Shareholders :- Role to appoint directors and auditors and to see if an appropriate governance structure is in place • Board of Director:- Responsible for governance of the company. • Management :- Responsibility of management is to ensure that control systems are in place to achieve objectives laid down by board. • Society – environmental protection; social consciousness • Trade - fairness in dealing M.R.Vanithamani , AP, SOM, VLBJCET

49. OBJECTIVES OF CORPORATE GOVERNANCE • That a properly structured board capable of taking independent and objective decisions is in place at the helm of affairs. • That the Board is balanced as regards the representation of adequate number of non – executive and independent directors who will take care of the interests and well being of all the stakeholders. • That the board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information. M.R.Vanithamani , AP, SOM, VLBJCET

50. LEGAL AND REGULATORY FRAME WORK • The Companies Act 1956 was the principals legislation providing the formal structure for corporate governance. • Securities and Exchange Board of India – Listing agreement – Clause 49 has made certain provisions with regard to corporate governance mandatory for listed companies. • Sarbannes Oxley Act (AS 5 serves as guideline) M.R.Vanithamani , AP, SOM, VLBJCET