BASICS OF CORPORATE GOVERNANCE..... ...!!

Meaning of corporate governance!!

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, executives, employees, customers, creditors, suppliers, and the community at large

Good Corporate Governance

It means governing the company in a value based manner.

OBJECTIVE - Enhancement of shareholder value keeping in view the interests of other stakeholders

Key Constitutes:
Shareholders Board of directors Management Corporate Governance involves PromotingTransparency- Everything happen in the company should known to all the stakeholders. Accountability- The management is accountable for its decision. Equanimity- (Equitable Treatment) Rights of all the shareholders are equal, regardless of major and minor shareholding.

MEANING OF CORPORATE!!
A corporation is an organization created (incorporated) by a group of shareholders who have ownership of the corporation. The elected Board of directors appoint and oversee management of the corporation.

Governance. ..meaning.!!
defines Governance as the act, manner, fact or function of governing, sway, control The word has Latin origins that suggest the notion of 'steering'. It deals with the processes and systems by which an organization or society operates.

Corporate Governance
Corporate governance is
a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations concerned with identifying ways to ensure that strategic decisions are made effectively used in corporations to establish order between the firms owners and its top-level managers

 Corporate governance specifies the distribution of rights And responsibililities among different participants in corporations.

 CG means a system by which corporate entities are under control and are directed CG attempts to put a check on the working of the organization.

Definition of CG..!!
CG denotes direction and control of the affairs of a company and it is the relationship between the owners ,directors and managers.

Corporate Governance
Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations

Corporate Governance Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations Concerned with identifying ways to ensure that strategic decisions are made effectively

Corporate Governance Corporate Governance is a relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations Concerned with identifying ways to ensure that strategic decisions are made effectively

Used in corporations to establish order between the firms owners and its top-level managers

Main features of CG..!!

1. It is a set of system and processes which embraces organization structure. Ensures best interest of the stakeholders Denotes direction leadership explains relationship between directors , owners and managers. Attempts to put a check on working ofa n organization.

2. 3. 4.

5.

Features continued
6. Protects interests of bond holders and society. 7. To make balance between economic and social goals. 8. Ensures timely flow of all info. t o board of directors. 9. Ensures sound system of risk management and internal control. 10. Leads to transparency in working of corporate affairs.

Scope of CG!!
IT provides the structure for setting objectives and providing means to attain them.

Benefits of good CG!!

1) 2) 3) 4) REDUCES RISK STIMULATES PERFORMANCE IMPROVES ACCESS TO CAPITALMARKETS ENHANCES THE MARKETIBILITY OF GOODS AND SERVICES IMPROVES LEADERSHIP DEMONSTRATES TRANSPARENCY AND SOCIAL ACCOUNTABILITY PROMOTES TRANSPARENCYINDECISIONM AKING PROCESS

5) 6)

7)

STEPS FOR MAKING CORPORATE GOVERNANCE EFFICIENT!!

i. ii. iii. iv. v. vi. vii. viii. ix. x. Commitment of the management Legal & administrative framework Transparency in decision making Proper implementation of codes Improving the system Reviewing banking system Making laws effective Strict compliance Increasing role of independent directors Highlighting governance role.

ACTIVITY TIME.!!
CORPORATE GOVERNANCE IS THE BLOOD THAT FILLS THE VEIN OF TRANSPARENT CORPORATE DISCLOSURE IN THE LIGHT OF THIS EXPLIAN THE IMPORTANCE OF CG.

Objectives of good corporate governance

Objectives of good corporate governance Strengthen management oversight functions and accountability Balance skills, experience and independence on the board appropriate to the nature and extent of company operations

 Establish a code to ensure integrity Safeguard the integrity of company reporting Risk management and internal control Disclosure of all relevant and material matters Recognition and preservation of needs of shareholders

 More efficient allocation of capital . Encourage higher levels of efficiency, quality, and competitiveness throughout the national economy. Boost private sector development. Create more jobs. Improve quality of living. Poverty alleviation of a Nation.

 Attracts investors Lowers costs of capital Improves performance, efficiency Reduces risks of financial crisis Promotes sustainable growth

Engages stakeholders
Defines responsibilities in Serving communities

A. Evolution of Corporate Governance: Wave of High Profile Scandals, Fraud, Crisis

1990s - CEO dismissals in the US (IBM, Kodak, etc.); Financial collapse of UK corporates (Polly Peck, Bank of Credit and Commerce Intl, Maxwell Group,etc.) 1997 - Asian Financial Crisis

2000 - Massive bankruptcies and criminal malfeasance (Enron, Worldcom, AIG, AOL, Arthur Andersen, etc.)
2008 - US Sub-prime Crisis goes global

2011 - Greece crises and impacts Eurozone

2012 - JP Morgans sloppy deals, Barclays Libor-rigging scandal

A.

Reactions/Interventions to address crisis

1992 - The Cadbury Report issued. Defined Boards responsibilities and accounting systems. 2000 - OECDs principles of corporate governance issued 2002 - Sarbanes and Oxley passed into law in the US 2008 - Bailouts of too big to fail corporates by governments e.g. Troubled Asset Relief Program in the US 2009 - Dodd-Frank Wall Street Reform and Consumer Protection Act Current - tighter monetary and financial policies, risk management

B. Corporate Governance in the Philippines 2001 - World Bank & IMF Report: Corporate Governance Assessment of the Philippines based on OECD Principles High concentration of wealth by limited number of families Weak enforcement of corporate law and capital market regulations Weak corporate boards Need to professionalize accounting and auditing sectors Poor disclosures of financial and non-financial information

Unprotected rights of minority shareholders Conclusion: Crisis in Leadership

B. SEC, PSE and BSP Response SEC issued Corporate Governance Code in 2002, amended in 2009 Required training and defined disqualifications of Directors CG scorecard self-assessment issued and mandated Required accreditation of external auditors, term of managing partner limited Required setting up of various Board Committees Imposed minimum of 2 independent directors in Boards

Required Audit Committees to Self-Assess Performance

Conclusion: More Regulation vs. Enforced Regulation

Separation of Ownership and Managerial Control

Separation of Ownership and Managerial Control

Basis of the modern corporation

Separation of Ownership and Managerial Control

Basis of the modern corporation Shareholders purchase stock, becoming...

Residual Claimants

Separation of Ownership and Managerial Control

Basis of the modern corporation Shareholders purchase stock, becoming...

Residual Claimants

- Shareholders reduce risk efficiently by holding diversified portfolios

Separation of Ownership and Managerial Control

Basis of the modern corporation Shareholders purchase stock, becoming...

Residual Claimants - Shareholders reduce risk efficiently by holding diversified portfolios

Professional managers contract to provide decision-making

Separation of Ownership and Managerial Control

Basis of the modern corporation Shareholders purchase stock, becoming...

Residual Claimants - Shareholders reduce risk efficiently by holding diversified portfolios

Professional managers contract to provide decision-making Modern public corporation form leads to efficient specialization of tasks

Separation of Ownership and Managerial Control

Basis of the modern corporation Shareholders purchase stock, becoming...

Residual Claimants

- Shareholders reduce risk efficiently by holding diversified portfolios

Professional managers contract to provide decision-making Modern public corporation form leads to efficient specialization of tasks - Risk bearing by shareholders - Strategy development and decision-making by managers

Agency Theory An agency relationship exists when:

Agency Theory
An agency relationship exists when: Shareholders

(Principals) Firm Owners

Agency Theory
An agency relationship exists when: Shareholders

(Principals) Firm Owners

Hire

Managers (Agents) Decision Makers

Agency Theory
An agency relationship exists when: Agency Relationship Shareholders

(Principals) Firm Owners

Risk Bearing Specialist (Principal)

Hire

Managerial DecisionMaking Specialist (Agent)

Managers (Agents) Decision Makers

which creates

Agency Theory The Agency problem occurs when:

- The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately

Agency Theory The Agency problem occurs when: - The desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to verify that the agent has behaved appropriately

Example: Overdiversification because increased product

diversification leads to lower employment risk for managers and greater compensation

Agency Theory The Agency problem occurs when: - The desires or goals of the principal and agent conflict
and it is difficult or expensive for the principal to verify that the agent has behaved appropriately

Example: Overdiversification because increased product

diversification leads to lower employment risk for managers and greater compensation

Solution: Principals engage in incentive-based performance

contracts, monitoring mechanisms such as the board of directors and enforcement mechanisms such as the managerial labor market to mitigate the agency problem

Agency Theory
Principals may engage in monitoring behavior to assess the activities and decisions of managers - However, dispersed shareholding makes it difficult and and inefficient to monitor managements behavior

Agency Theory
Principals may engage in monitoring behavior to assess the activities and decisions of managers - However, dispersed shareholding makes it difficult and and inefficient to monitor managements behavior

For example: Boards of Directors have a fiduciary

duty to shareholders to monitor management

- However, Boards of Directors are often accused of

being lax in performing this function

Agency Relationship: Owners and Managers

Shareholders (Principals)
Firm owners

Decision makers

Managers (Agents)

Risk bearing specialist (principal) pays compensation to a managerial decision-making specialist (agent)

An Agency Relationship
44

Issues in corporate governance.

CG Is a system by which corporate entities are being controlled and directed . corporate governance attempts to puts check on working of an organization .it checks the balance between directors, auditors and management..

 Corporate Governance is concerned with holding the balance between economic and social goals and between individual and public 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 interest of individuals, corporations and society.

 The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust.

 Shareholders role in governance is to appoint the directors and the auditors. Poor corporate governance has ruined companies, sent directors to jail, and destroyed a global accounting firm and threatened economies and governments.

Objectives of CG.!!
Parties to corporate governance Board of directors Managers Workers Shareholders or owners Regulators Customers Suppliers Community (people affected by the actions of the organization)

Corporate Governance Mechanisms

Internal Governance Mechanisms
Ownership Concentration Board of Directors Managerial Incentive Compensation Multidivisional Organizational Structure

External Governance Mechanisms

Market for Corporate Control

51

Governance Mechanisms

Ownership Concentration Boards of Directors

Executive Compensation
Multidivisional Organizational Structure Market for Corporate Control

Governance Mechanisms

Ownership Concentration

Governance Mechanisms

Ownership Concentration
- Large block shareholders have a strong incentive to monitor management closely

Governance Mechanisms

Ownership Concentration
- Large block shareholders have a strong incentive to
monitor management closely - Their large stakes make it worth their while to spend time, effort and expense to monitor closely

Governance Mechanisms

Ownership Concentration
- Large block shareholders have a strong incentive to
monitor management closely - Their large stakes make it worth their while to spend time, effort and expense to monitor closely - They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)

Governance Mechanisms

Boards of Directors

Governance Mechanisms

Boards of Directors
- Insiders - Related Outsiders - Outsiders

Governance Mechanisms

Boards of Directors
- Insiders - Related Outsiders - Outsiders - Review and ratify important decisions

Governance Mechanisms

Boards of Directors
- Insiders - Related Outsiders - Outsiders - Review and ratify important decisions - Set compensation of CEO and decide when to replace the CEO

Governance Mechanisms

Boards of Directors
- Insiders - Related Outsiders - Outsiders - Review and ratify important decisions - Set compensation of CEO and decide when to replace the CEO - Lack contact with day to day operations

Governance Mechanisms

Recommendations for more effective Board Governance

Governance Mechanisms

Recommendations for more effective Board Governance

- Increase diversity of board members backgrounds - Strengthen internal management and accounting control systems
- Establish formal processes for evaluation of the boards performance

Governance Mechanisms

Executive Compensation

Governance Mechanisms

Executive Compensation
Salary, Bonuses, Long term incentive compensation

Governance Mechanisms

Executive Compensation
Salary, Bonuses, Long term incentive compensation
- Executive decisions are complex and non-routine - Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes

- In addition, stock ownership (long-term incentive

compensation) makes managers more susceptible to market changes which are partially beyond their control

Governance Mechanisms

Executive Compensation
Salary, Bonuses, Long term incentive compensation - Executive decisions are complex and non-routine - Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes - In addition, stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control Incentive systems do not guarantee that managers make the right decisions, but they do increase the likelihood that managers will do the things for which they are rewarded

Governance Mechanisms

Multidivisional Organizational Structure

Governance Mechanisms

Multidivisional Organizational Structure

Designed to control managerial opportunism

Governance Mechanisms

Multidivisional Organizational Structure

Designed to control managerial opportunism
- Corporate office and Board monitor business-unit managers strategic decisions

- Increased managerial interest in wealth maximization

Governance Mechanisms

Multidivisional Organizational Structure

Designed to control managerial opportunism
- Corporate office and Board monitor managers strategic decisions - Increased managerial interest in wealth maximization

M-form structure does not necessarily limit corporatelevel managers self-serving actions

Governance Mechanisms

Multidivisional Organizational Structure

Designed to control managerial opportunism
- Corporate office and Board monitor managers strategic decisions - Increased managerial interest in wealth maximization

M-form structure does not necessarily limit corporatelevel managers self-serving actions - May lead to greater rather than less diversification

Governance Mechanisms

Multidivisional Organizational Structure

Designed to control managerial opportunism
- Corporate office and Board monitor managers strategic decisions - Increased managerial interest in wealth maximization M-form structure does not necessarily limit corporatelevel managers self-serving actions - May lead to greater rather than less diversification

Broadly diversified product lines makes it difficult for top-level managers to evaluate the strategic decisions of divisional managers

Governance Mechanisms

Market for Corporate Control

Governance Mechanisms

Market for Corporate Control

Operates when firms face the risk of takeover when they are operated inefficiently

Governance Mechanisms

Market for Corporate Control

Operates when firms face the risk of takeover when they are operated inefficiently
- The 1980s saw active market for corporate control, largely as a result of available pools of capital (junk bonds)

- Many firms began to operate more efficiently as a result of

the threat of takeover, even though the actual incidence of hostile takeovers was relatively small

- Changes in regulations have made hostile takeovers difficult

Governance Mechanisms

Market for Corporate Control

Operates when firms face the risk of takeover when they are operated inefficiently
- The 1980s saw active market for corporate control, largely as a result of available pools of capital (junk bonds)

- Many firms began to operate more efficiently as a result of

the threat of takeover, even though the actual incidence of hostile takeovers was relatively small

- Changes in regulations have made hostile takeovers difficult

The market for corporate control acts as an important source of discipline over managerial incompetence and waste

Corporate Governance and Ethical Behavior It is important to serve the interests of multiple stakeholder groups

Corporate Governance and Ethical Behavior

It is important to serve the interests of multiple stakeholder groups Shareholders are one important stakeholder group, which are served by the Board of Directors

Corporate Governance and Ethical Behavior

It is important to serve the interests of multiple stakeholder groups Shareholders are one important stakeholder group, which are served by the Board of Directors Product market stakeholders (customers, suppliers and host communities) and Organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups

Corporate Governance and Ethical Behavior

It is important to serve the interests of multiple stakeholder groups Shareholders are one important stakeholder group, which are served by the Board of Directors Product market stakeholders (customers, suppliers and host communities) and Organizational stakeholders (managerial and non-managerial employees) are also important stakeholder groups

Although controversial, some believe that ethically responsible firms should introduce governance mechanisms which serve all stakeholders interests

code of business conduct???

This Code of Business Conduct and Ethics helps ensure compliance with legal requirements and our standards of business conduct

Code of conduct continued..!!

All Company employees are expected to read and understand this Code of Business Conduct and Ethics, uphold these standards in day-to-day activities, obey with all applicable policies and procedures, and ensure that all agents and Contractors are aware of, understand and adhere to these standards. Because the principles described in this Code of Business Conduct and Ethics are general in nature COMPLIANCE IS EVERYONE'S BUSINESS

 Ethical business conduct is critical to our business. As an employee, your responsibility is to respect and adhere to these practices. Many of these practices reflect legal or regulatory requirements. Violations of these laws and regulations can create significant legal responsibility for you, the Company, its directors, officers, and other employees. Part of your job and ethical responsibility is to help enforce this Code of Business Conduct and Ethics.

Code of corporate practice..!!

Written guidelines i ssued by an official body or professional associ ation to its members to help themcomply with its ethical standards.

Example of code of corporate practice!!

The International Council of Toy Industries (ICTI), an association of associations, is committed on behalf of its member companies to the operation of toy factories in a lawful, safe, and healthful manner. It upholds the principles that no underage, forced, or prison labor should be employed; that no one is denied a job because of gender, ethnic origin, religion, affiliation or association, and that factories comply with laws protecting the environment.

 Supply agreements with firms manufacturing on behalf of ICTI members must also provide for adherence to these principles. The role of ICTI is to inform, educate, and survey its members so that individual member companies can adhere to its Code of Business Practices. As an association, it also acts tao encourage local and national governments to enforce wage and hour laws and factory health and safety laws

 Specific operating conditions that member companies are expected to meet and obtain contractor agreement in advance are as follows:

Labor..!!
That working hours per week, wages and overtime pay practices comply with the standards set by law or, in the absence of a law, address humane, safe and productive working conditions; that no one under the legal minimum age is employed in any stage of toy manufacturing; that a minimum age of 14 applies in all circumstances, but notwithstanding the foregoing, that C138 Minimum Age Convention (1973) and C182 Worst Forms of Child Labor Convention (1999) of the International Labor Organization apply; that no forced or prison labor is employed, that workers are free to leave once their shift ends, and that guards are posted only for normal security reasons; that all workers are entitled to sick and maternity benefits as provided by law; that all workers are entitled to freely exercise their rights of employee representation as provided by local law.

THE WORKPLACE.!!

That toy factories provide a safe working environment for their employees and comply with or exceed all applicable local laws concerning sanitation and risk protection; that the factory is properly lighted and ventilated and that aisles and exits are accessible at all times; that there is adequate medical assistance available in emergencies, and that designated employees are trained in first aid procedures; that there are adequate and well-identified emergency exits, and that all employees are trained in emergency evacuation;

WORKPLACE CONTINUED!!
that protective safety equipment is available and employees are trained in its use; that safeguards on machinery meet or exceed local laws; that there are adequate toilet facilities which meet local hygiene requirements, and that they are properly maintained; that there are facilities or appropriate provisions for meals and other breaks; if a factory provides housing for its employees, it will ensure that dormitory rooms and sanitary facilities meet basic needs, are adequately ventilated and meet fire safety and other local laws; that

Compliance..!!
The purpose of this Code is to establish a standard of performance, to educate, and to encourage commitment to responsible manufacturing, not to punish. To determine adherence, ICTI member companies will evaluate their own facilities as well as those of their contractors. They will examine all books and records and conduct on-site inspections of the facilities, and request that their contractors follow the same practices with subcontractors. An annual statement of compliance with this Code must be signed by an officer of each manufacturing company or contractor.

Contracts for the manufacture of toys should provide that a material failure to comply with the Code or to implement a corrective action plan on a timely basis is a breach of contract for which the contract may be canceled. Because of the great diversity in the kinds of toys manufactured and the manufacturing methods used, as well as the wide range in factory sizes and numbers of employees, three annexes are attached to this Code to provide guidelines for determining compliance. A rule of reason must be used to determine applicability of the annex provisions. This Code should be posted or available for all employees in the local language.

Board of Directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board. It is often simply referred to as "the board."

Rights of Directors ..!!

Directors have the right to: Participate in corporate decisions and inspect corporate books and records. Compensation (usually a nominal sum) and indemnification. If a director is sued for acts as director, the corporation should guarantee reimbursement (indemnification) or purchase liability insurance to protect the board from personal liability

 A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's bylaws. The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet.

Typical duties of boards of directors include

governing the organization by establishing broad policies and objectives; Selecting, appointing, supporting and reviewing the performance of the chief executive; ensuring the availability of adequate financial resources; Approving annual budgets; Accounting to the stakeholders for the organization's performance.

 The legal responsibilities of boards and board members vary with the nature of the organization, and with the jurisdiction within which it operates. For public corporations, these responsibilities are typically much more rigorous and complex than for those of other types.

CG SYSTEM WORLDWIDE..!!

 World wide corporate governance systems (outsider) are those in which the owners of firms tend to have a transitory interest in the firm and do not have close relationships with those in senior managerial positions within the company.

 Rather, these systems are characterized by relationships between management and shareholders being fluid and armslength. Outsider systems are also characterized by the existence of an active 'market for corporate control'- takeovers, particularly hostile ones, are seen as both a remedy for managerial failure and a disciplinary mechanism on managers, ensuring that they act in the best interests of shareholders. Indeed, a further feature of this system in the protection of shareholder rights over those of other organizational groups (particularly employees).

 by contrast, in 'insider' systems the owners of firms tend to have an enduring interest in the company and often hold positions on the board of directors or other senior managerial positions. These systems are characterized by stable and close relationships between management and shareholders. This stability of ownership, often coupled with legal or institutional barriers to takeovers, means that there is little by way of a market for corporate control. Moreover, insider systems are characterized by the existence of formal rights for employees to influence key managerial decisions, often through supervisory boards or works council-type bodies.