Corporate Governance

SOME THOUGHTS ON CORPORATE GOVERNANCE

1) INTRODUCTION

CORPORATE GOVERNANCE

Corporate Governance is a phenomenon of recent origin.

The concept of Corporate Governance hinges on total transparency, integrity and accountability of Management.

2) CORPORATE FAILURES

CORPORATE GOVERNANCE

The Origin of Corporate Governance lies in Corporate failures and Corporate Scams. The Corporate failures/Scams have occurred in some of the following areas and for some of the following reasons :

Corporate Governance

• A) Areas

i) Transgression of Law / Legal System .

ii) Large scale Diversion of Funds to Risky ventures .

iii) Diversion of Funds to associate concerns

AREAS

iv) Preferential allotment of Shares at low prices to promoters / associates .

v) Spinning off profitable business operations to

subsidiary Companies and charging royalty for use of Brand name by parent Company .

vi) Insider Trading . 

Areas

vii) Big Public Issues - Address of Registered office non - traceable.

 viii) Projections in Prospectus and

actuals never close . ix)Rubber Stamp Boards . x) Accounting & Audit lacunae.

Areas

xi)Auditor / Consultant relationship with Company.

 

xii)Financial Reporting, Wrong Accounting practices.

 

xiii)Corporate Disclosure.

 

xiv)Shareholder Protection.

 

xv)Social Responsibility.

b) REASONS

i) Out dated Company Law .ii) Small % Shareholding but full

control of Management .iii) Ignorant Investors .iv) Family Management .v) Lack of Professionalisation .

b) Reasons

vi) Institutions holding larger % of shares but effecting least control .

 vii) Politically motivated appointments of

CEOS

viii) Stock Market Scams .

ix) Weak Stock exchanges regulations, Regulators .

b) Reasons

x) No Protection to Shareholders - No returns to Shareholders .

xi) Lack of Transparency .

xii)Lack of Accountability . 

xiii) Lack of Business Ethics .

b) Reasons

xiv) Lack of Integrity . xv) Lack of Business Plans / Strategy

.

xvi) Changes in Ownership .

xvii)Lack of Commitment to values.

b) Reasons

xviii)Lack of Benchmarks.

 

xix)Political Intervention.

 xx) No shareholder participation . xxi) Human side of Business

ignored .

b) Reasons

xxii) Lack of information to Shareholders . xxiii) Corporate Arrogance .

xxiv) Poor Structure of the Board of Directors. 

xxv) No Legislation on Corporate Governance.

Corporate Governance

3. CORPORATE GOVERNANCE  

Corporate Governance is a Voluntary ethical Code of business of Companies. It is a System, a process by which companies are directed and controlled and managed in the best interests of all.

 

Corporate Governance is concerned with the establishment of a system whereby the Directors are entrusted with responsibilities and duties in relation to the directions of Corporate affairs . It is concerned with accountability of who are managing it. It is concerned with morals, ethics, values, parameters, conduct and behaviour of the Company and its management .

 

Corporate Governance

It is an interplay between Companies, Shareholders, Creditors, Capital Markets, Financial Sector, Institutions and Company Law .

4. MODERN CORPORATES

Modern Corporates have been forced into good Governance, whether they like it or not because of the following reasons :

 i) Globalisation and international

Exposure / Pressure .

ii) Global Competition and drastic changes in Management approach .

4. MODERN CORPORATES

iii) Global Market driven economy stipulating transparency and business ethics.

iv) Need of the present day Corporate World .

v) Arrival of FIIs and FDI inflows.

vi) Clause 49 of Listing Agreement.

5) Corporate Manifesto

• Every Corporate body is expected to develop its own manifesto in the following areas :

i) Corporate Excellence .

ii) Corporate Performance . iii) Centre for Corporate Excellence .

5) Corporate Manifesto

iv) Corporate Democracy . v) Corporate Integrity . vi) Corporate Strength .

vii) Corporate Transparency .

5) Corporate Manifesto

viii) Corporate Ethics .

ix) Corporate Propriety . x) Corporate Mission . xi) Corporate Policy . xii) Code of Governance .

6) Test of Corporate Governance

Several tests have to be adopted to assess whether there has been effective corporate governance. Broadly, the test of corporate governance should cover the following aspects :

6) Test of Corporate Governance

(a) Whether the funds of the Company have been deployed for pursing the main objects of the Company as enshrined in the Memorandum of Association .

 (b) Whether the funds raised from financial

institutions and the capital market have been utilised for the purposes for which they were intended ?

6) Test of Corporate Governance

(c) Whether the Company has the core competence to effectively manage its diversifications ?

 (d) Whether there has been diversion of

funds by way of loans and advances or investments to subsidiary or investment companies ?

 

6) Test of Corporate Governance

(e) Whether the personal properties of the Directors have been let out at a fabulous rent to the Company ?

 (f) Whether the funds of the

Company have been diverted to the promoters through shell companies to permit the promoters to shore up their stake in the company ?

6) Test of Corporate Governance

(g) Whether the provisions of the Companies Act, FEMA, the Factories Act and other statutes are complied with, in letter and in spirit ?

 (h) Whether the practices adopted

by the Company and its management towards its shareholders, customers, suppliers, employees and the public at large are ethical and fair ?

6) Test of Corporate Governance

(i) Whether the directors are provided with information on the working of the company and whether the institutional and non-executive directors play an active role in the functioning of the companies ?

 (j) Whether the internal controls in

place are effective ?

6) Test of Corporate Governance

(k) Whether there is transparent financial reporting and audit practices and the accounting practices adopted by the company are in accordance with ICAI accounting standards ?

6) Test of Corporate Governance

The ultimate test of Corporate Governance is the Capital Market.

The advent of FIIs has brought in increasing sophistication and professionalism in the way the Market judges companies and the quality of Management .

6) Test of Corporate Governance

Companies which have rewarded Shareholders, followed accounting policies and implemented expansion plans out of internal accruals, struck to their areas of core competence and consolidated their market shares have been winners in the Stock market .

7. CORPORATE GOVERNANCE

RATING

Unbiased, dispassionate and neutral rating by professional bodies is called for. The parameters on which the rating could be carried out as indicated in the monograph published by the WIRC of ICSI are as below :

7. CORPORATE GOVERNANCE RATING

I. Management (6) Max. Score 30a) Leadership & Strategy .b) Competencec) Decision Makingd) Organisational Climate

7. CORPORATE GOVERNANCE RATING

II. Ethics (5) Max. Score 25a) Written Codeb) Corporate Social Responsibilityc) Good Business Practices - GBP

7. CORPORATE GOVERNANCE RATING

III. Customers (4) Max. Score 20a) Good Manufacturing / Service Practices - GMP / GSP

b) Customer Satisfaction

7. CORPORATE GOVERNANCE RATING

IV.Creativity and Innovation (3) Max.

Score 15a) New Products/Servicesb) R & D Initiativesc) Other Innovations

7. CORPORATE GOVERNANCE RATING

V. Financial Performance (2)

Max. Score 10a) Wealth Creationb) Wealth Managementc) Wealth Distribution

7. CORPORATE GOVERNANCE RATING

VI. Disclosure Standards (1)

Max. Score 05a) Adequacy and Complianceb) Better Standards

8. CONCLUSION :

- Not all well governed corporates do well in business, nor do the badly governed ones always sink. Even the best performers risk stumbling some day, if they lack strong and independent Boards of Directors.

8. CONCLUSION :

- Women are effective force both for good Governance and for business trust. Can we have more women on boards?

  - Today Corporates are not lootable

resources any more but Global public goods.

  - Can we discuss new national and

international financial architecture which could overcome financial scams.

8. CONCLUSION :

- Can Indian Corporates become models in Corporate Governance practices?

Whose interests do Corporates

serve ?  Should there be a Corporate

Governance audit and Corporate Governance officers ?

THANK YOU