BA7024 CORPORATE FINANCE

Unit V
- Corporate governance
-SEBI guidelines
-Corporate disasters and ethics
-CSR
-Ethics and Professionalism
What is Corporate Governance ?
CG is the system by which companies are
directed and controlled.
A set of mechanisms through which outside
investors protect themselves against
expropriation by the insiders.
Ways of ensuring that corporate actions assets
and agents are directed at achieving corporate
objectives.
Characteristics of corporate governance

Based on ethics
Must avoid unfair practices, cheating, exploitation.
Universal application
Given legal recognition in many countries.
Systematic
Based on laws, procedures, practices.
 Represents business decisions framework
Ethical and moral framework under which
decisions are taken.
Key part of the contract
Key part of the contract.
Assurance to well functioning of markets
Well functioning markets needed for economic
growth.
 Scope of corporate governance
Auditors
Externally appointed auditors play an important
role
Stock markets
Rules that govern the stock market play a vital role
Shareholders/institutional investors
Market intermediaries play a vital role
 Government
Enacting of legislation that facilitates
Regulatory authority
Company jurisdictions play a separate regulatory
authority.
Contractual stakeholders
Upstream, downstream and added value chains
from suppliers
 Need of corporate governance
Impact of globalization
Corporate have to face the challenges
Economic changes
To survive in the changing economic environment
Change in the structure of shareholding
Ownership has created new problems for the management.
Financial reporting and transparency
Demanding more and more information from the
company.
Shareholders net worth and net wealth
Maximization of wealth through maximization of profits.
 Objectives of corporate governance
To eliminate or mitigate conflicts
To ensure that the assets of the company are
used efficiently
To create a trust in the corporate
To exercise effective control on corporate affairs
To promote business development
To improve the efficiency of capital markets
To enhance the effectiveness
To promote a healthy environment
 Principles of corporate governance
Fairness
Business is conducted without any detriment
Transparency and disclosure
Explaining a companys policies, decisions, and
actions.
Responsibility
Should be in the best interest of the society
 Trusteeship
Responsibility to enquire equity.
Empowerment and accountability
Increasing the spiritual, social, political and econimical
strength.
Controls
Necessary concomitant of core principles of governance.
Ethical corporate citizenship
Unethical behaviour corrupts organisational culture and
stakeholder value.
 Corporate Governance Mechanism
Internal corporate governance controls
Monitoring by the board of directors
Remuneration
Audit committee
External corporate governance controls
Debt covenants
Government regulations
Competition
External auditor
Managerial external labor market
SEBI guidelines on Corporate Governance

Kumar Mangalam Birla Committee

Inscribed in the year 1999
Setup by SEBI Board
To promote and raise the standards of corporate
governance.
Led by Shri Kumar Mangalam Birla
Introductory of stock market reforms
 Kumar Mangalam Birla Committee
Setup systems of good corporate governance
Systems which allow sufficient freedom to the
boards and management to take decisions
towards the progress of their companies and to
innovate
Promote a culture of strong and independent
oversight
Setup transparent corporate disclosure norms and
high quality accounting practices.
 Kumar Mangalam Birla Committee
Recommend a statutory code as under indian
conditions a statutory rather than a voluntary
code would be far more purposive and
meaningful.
Draft a code of corporate best practices
Suggest safeguards to be instituted within the
companies to deal with insider information
Suggest suitable amendments to the listing
agreement executed by the stock exchanges.
Mandatory Disclosure of KMB Committee

Applicability
Applicable to all listed companies with paid up share
capital of 3 crore and above.
Board of directors
Optimum combination of executive and non
executive directors.
Audit committee
To act as a catalyst for effective financial reporting.
Remuneration committee of the board
Full disclosure should be made.
 Board procedures
Board meeting to be held atleast four times a year
Management
Translating the policies and strategies of the board.
Shareholders
Have certain rights and responsibilities
Report on corporate governance
Detailed complete report on CG should be added in
the AGM report.
 Non Mandatory Disclosure of KMB
Committee
Chairman of the board
Chairmans role should be different from CEOs role.
Remuneration committee
To determine on their behalf of the shareholders with
agreed terms of reference and companys policy.
Shareholder rights
Half yearly declaration of financial performance including
summary of the significant events in last six months.
Postal ballot
Formality of holding the general meeting is gone through
 SEBI and Revised clause 49
Independent directors
Must have a minimum number of independent
directors
Non executive directors
Term of office limited to 3 terms, 3 years each.
Board of directors
Frame a code of conduct for all board members
Audit committee
Audit reports of management discussions
 Whistleblower policy
Communicated to all employees
Subsidiary companies
50 percent directors and 1/3 and independent directors
depending on whether the chairman is non executive
Disclosures
Contingent liabilities / basis of related party transactions.
Certifications
Necessary financial statements and directors report.
Role of directors in corporate governance

Directors exhibit total commitment to

the company
Directors steer discussion property
Directors make clear their stand on
issues
 Directors ensure efficient CEOs
Directors anticipate business events
Directors have long term focus and
stakeholders interests
Directors promote overall interests of the
company
 Theories of Corporate Governance

Agency theory
Contractual link between the shareholders that
provide capital to the company and the
management who runs the company
The number of shareholders and the complexity of
operations grew to operate the economy.
 Theories of Corporate Governance

Stewardship theory
Self interested behaviour and rests on dealing with
the cost.
Managers are assumed to work to improve their
own position
Managers inherently seek to do a good job,
maximise company profits and bring good returns.
 Theories of Corporate Governance

Stakeholder theory
Stresses on the dependency of many different
groups on the firms management.
Who benefits from a firm, as well as who infact
controls
Includes customers, suppliers, employees,
community and even the government.
 Theories of Corporate Governance

Sociological theory
Focused mostly on board composition
Implication on power and wealth composition
Financial reporting, disclosures, auditing, are
necessary mechanisms to promote equity and
fairness.
 Theories of Corporate Governance

Resource dependency theory

Resources to an organisation through their
linkages to the external environment
Outside directors who are partners to a law firm
provide legal advice either in board meetings or in
private communication.
Insiders, business experts, support specialists,
community influential's are a part of it.
 Theories of Corporate Governance

Transaction cost theory

Interdisciplinary alliance of law,
economics and organisations.
Combination of people with transaction
suggests that transaction cost theory
managers are opportunities and arrange
firms transactions to their interests.
 Issues of corporate governance
Distinguishing the roles of board and
management
Composition of the board and related issues
Seperation of the roles of the CEO and
chairperson.
Should the board have committees
Appointment to the board and directors and re
election
 Directors and executives remuneration
Disclosure and audit
Protection of shareholder rights and
expectations
Dialogue with institutional shareholder issue
Socially responsible corporate citizen
 Principles of ethics
Beneficence
The priority to do good makes an ethical perspective.
Least harm
Similar to beneficence but deals with situations in which
neither choice is beneficial.
Respect for autonomy
An ethical theory should allow people to reign over
themselves and to be able to make decisions that apply to their
lives.
Justice
Ethical principle states that ethical theories should prescribe
actions that are fair to those involved.
 Types of ethics
Normative or prescriptive ethics
Attempts to answer specific moral questions concerning what
people should do or believe.
Descriptive ethics
Presentation of facts related to the specific ethical actions of
an individual or an organisation.
Applied ethics
Discipline of philosophy that attempts to apply ethical theory
to real life situations.
Meta ethics
Study of what ethics means and to what degree ethical claims
are ever be justified.
 Advantages / Importance of Ethics

Corresponds to basic human needs

Helps in better decision making
Inhibits chances of errors
Enhances cooperation
Assists in dealings
Promotes moral and social values
 Corporate disasters
A crisis situation causing widespread damage
which far exceeds our ability to recover.
It also questions or challenges our ability to
suffocate or to suffer.
Severity, persistence, lack of quick and appropriate
response to misconduct public scrutiny.
Ethical misconduct scandals can spring from any
segment or level of a companys operations
 Example of Corporate Disaster
The Satyam Computers Fiasco
Share markets collapsed
Company was declared bankrupt
The reason stated was unethical conduct of the
company to its shareholders
Unethical conduct refers to window dressing of
financial data
Founders and company officials are behind bars.
List of Corporate Disasters in Recent Years
Northern Rock 22 Feb 2008 Banking
Lehman Brothers 15 Sep 2008 Banking
AIG 16 Sep 2008 Insurance
Washington Mutual 26 Sep 2008 Banking
Royal Bank of
13 Oct 2008 Banking
Scotland Group
ABN-Amro Oct 2008 Banking
Bernard L. Madoff
Investment Securities Dec 2008 Securities
LLC
Bankwest 2008 Banking
Nortel 14 Jan 2009 Telecomms
Anglo Irish Bank 15 Jan 2009 Banking
Arcandor 9 June 2009 Retail
Schlecker 23 Jan 2012 Retail
Dynegy 6 July 2012 Energy
Banco Esprito
3 August 2014 Banking
Santo (BES)
 Corporate Social Responsibility
Means devising corporate strategies and
building a business with a societys need in
mind.
Continuing commitment by business to behave
ethically and contribute to economic
development.
Improving quality of work life of their
workforce and their families.
 Need of CSR
To provide sense of responsibility
To fulfill long run self interest
To improve public image
To avoid government regulations
or control
 To avoid misuse of national resources
and economic power
To avoid class conflicts
To convert resistances into resources
To minimize environmental damage
 CSR towards Stakeholders
Responsibility towards shareholders or owners
Responsibility towards employees or workers
Responsibility towards customers
Responsibility towards suppliers
Responsibility towards creditors
Responsibility towards government
Responsibility towards society or community
 Argument against CSR
Profit Maximization
Disfavoring concept is business has
profit maximisation as its main
objective.
Society has to pay the cost
Cost of the social responsibility will be
passed on to the society
Lack of social skills
Business managers are best at
managing matters relating to business.
 Business has enough power
Society should not take any steps which give it more
power
Social overhead cost
Will not immediately benefit the business, will take
some time.
Lack of Accountability
Businessman have no direct accountability to the
people.
Lack of Broad Support
Involvement in social goals lack support from all
groups in society.
 Who is a stakeholder ?
Any group of people who have a stake in
business.
Those who are vital to the survival and success
of the organization.
Any group that is affected by the activities of
the organization.
 Types of Stakeholders
Internal Stakeholders
Shareholders
Considered to be the owners of the corporation, share of the
profit is given to the shareholders in return for their
investments in the form of shares.
Workers / employees
Legal contract of employment governs the relationship
between the organisation and its employee, and its
responsibility of the organization to meet their expectations.
Management
Has an impact on stakeholders, role of management involves
in balancing the multiple claims of different stakeholders.
 External stakeholders
Customers
Exchange resources for the products of the firms and in
return receive the benefits of the products.
Suppliers
Supply raw materials and other items required by
manufacturers and traders.
Creditors
Organization buy goods on credit from suppliers.
 Competitors
Business entities are equally obliged to other business firms
as they are towards stakeholder.
Government
Every enterprise should manage its affairs according to the
laws affecting it.
Society/community
Every business owes an obligation to the society at
large.
 Stake holders and ethics
Employees of PR firm are concerned with
their right to earn a living
Firms government may be pre occupied with
maintaining cordial relation with developing
country.
Shareholders are motivated y the prospect of a
client signing a lucrative, long term contract.
 Professionalism
A commitment to a calling which has a set of
normative and behavioral expectations
A specialized education and training
Membership of an association of similarly
trained people.
A service orientation
A relative degree of autonomy.
 Need for professionalism
Establish Boundaries
Establishes boundaries between what is considered
appropriate office behavior and what is not.
Encourage Improvement
Employees dress and operate professionally is
more conducive for success.
Maintain Accountability
Providing information to the clients by means of
written company reports, business plans and other
correspondences.
 Promote Respect
Establishes respect for authority figures, clients,
and co-workers.
Minimize Conflict
Benefits diverse environments in which business
people and their clients have several different
perspectives and opinions.
 Ethics and Professionalism
Savior
Responsible for creating a utopian society without
much effort.
Guardian
Given position of high authority based on their
expertise skills in determining what is best.
Bureaucratic servant
Servant who receive and translates the directive of
management into better achievements.
 Social servant
Not only providing services to others but also their
responsibility to the society.
Social enabler and catalyst
Need to help the management and society to understand
their needs and to create decisions.
Game player
To play successfully within the organization enjoying
the happiness of technological work and the satisfaction
of winning