PREPARED BY:
Hardik Bakarania
Jignesh Panchal
Harshit Doctariyawala
Ravi Panchal
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
firm’s owners and its top-level managers
Corporate governance depend upon two factors.
1.The commitment of management towards the principal
of integrity and transparency in business operation.
2.The legal and the administrative framework created by
the government of the country in which business
operates.
Principles of corporate governance
• Corporate governance is based on the principles of
integrity, fairness, equity, accountability and
commitment to values.
• Good governance practices are based on the culture,
mindset and shared values of the organization.
• There is always a dichotomy between the board of
directors and the management of a company.
Agency Relationship: Owners and
Managers
An agency relationship exists when:
Shareholders
(Principals)
Agency Relationship: Owners and
Managers
An agency relationship exists when:
Shareholders
(Principals)
Hire
Managers
(Agents)
Agency Relationship: Owners and
Managers
An agency relationship exists when:
Shareholders
(Principals)
Hire
Managers
(Agents)
creates
An Agency
Relationship
Agency theory
• The relationship between the principals, such as
shareholders and agents such as the company
executives and managers.
• Shareholders expect the agents to act and make
decisions in the principal’s interest.
• It was introduced basically as a separation of
ownership and control.
• It prescribes that people or employees are held
accountable in their tasks and responsibilities.
Stewardship Theory
• Theory suggests that sociological and psychological
needs drives the business.
• Steward protects and maximises shareholders wealth
through firm performance.
• The firm’s performance can directly impact
perceptions of their individual performance
• This approach is typically participative in nature and
involves a similar interests between shareholders
and that of the management.
• The theory assumes that the shareholders are to
assume risk and decision making is based on trust.
Principles
• First principle is, managers work as agents of
investors and their behavior with investors and other
shareholders determines the quality of governance
and performance of the firm.
• Second principle is, the impact of corporate
governance system on the economic efficiency of the
company, with a strong emphasis on balancing
shareholders’ welfare with that of the other
stakeholders.
Development of corporate governance in India
• Qualitative improvement in corporate governance in India
is based on a code of good corporate practices that refers
to meaningful disclosures of information to shareholders.
Committees and groups which have
recommended various steps in governance
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Working group on companies act, 1996
Initiative by confederation of Indian industry
SEBI’s initiatives
Naresh chandra committee report, 2006
Narayana murthy committee report, 2003
J J irani committee report on company law, 2005
Working group on companies act, 1996
• Government felt that it is necessary to completely
rewrite the companies act in light of the modern day
requirements of the corporate sector, the hope of
investors, and the globalization and liberalization
economy.
• So govt. set up a working group in august 1996 for
this purpose.
• The working group has recommended number of
changes in the companies act and prepared working
draft of companies bill 1997.
• The bill was introduced in rajya sabha on 14 aug.
1997.
Initiative by confederation of indian industry
• In 1996, CII took initiative following public concern
over
• The protection of investors’ interest,
• The promotion of transparency within business and
industry,
• The need to move towards international standards in
terms of
• disclosure of information by the corporate sector,
• To develop a high level of public confidence in business and
industry.
SEBI’s initiatives
• In 1999, SEBI appointed a committee to promote and raise the
standard of corporate governance. It’s recommendations are,
 continues disclosure of financial and non financial, manner
and frequency of such disclosures, and the responsibility
of independent and outside directors.
 Drafting a code for corporate best practices.
 Safeguards to be instituted within companies to deal with
insider information and insider trading.
Narayana murthy committee report, 2003
• It was set up by SEBI under Infosys founder Narayana
murthy. The recommendations were,
 To review the performance of corporate governance.
To determine the role of companies in responding to run
over and other price sensitive information circulating in
the market, in order to enhance transparency and
integrity of the market.
Governance mechanisms
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Ownership Concentration
Boards of Directors
Executive Compensation
Market for Corporate Control
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.
Boards of Directors
• Board of directors is a group of elected individuals
whose primary responsibility is to act in the best
interests by formally monitoring and controlling the
corporation’s top level executives.
• Board of directors may be,
Insiders
Related Outsiders
Outsiders
• Review and ratify important decisions.
• Set compensation of CEO and decide when to
replace the CEO.
Enhance the effectiveness of board of
directors through
• Strengthen internal management and accounting
control systems.
• Establish formal processes for evaluation of the
board’s performance.
• Increase in diversity of board members backgrounds.
Executive Compensation
• Executive Compensation is a governance mechanism that
seeks to align the interests of managers and owners through
Salary, Bonuses, Long term incentive compensation.
Incentive systems do not guarantee that
managers make the “right” decisions
because,
• 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.
Market for Corporate Control
• Market for Corporate Control is an external governance
mechanism that becomes active when a firm’s internal
controls fail.
• It is composed of firms that buy ownership positions in or take
over potentially undervalued corporations so they can form
new divisions in established diversified companies.
• Because the undervalued firm’s executives are assumed to be
responsible for poor performance of firm, they usually
replaced.
• So when market for Corporate Control operates, the
managers will work efficiently and disciplined.
Key aspects of governance
• Enhancement of shareholder value, keeping in view the
interest of other stakeholders.
• The framework applies to all listed private and public sector
companies.
• The board provides leadership and strategic guidance for the
company.
• The role of chairman and chief executive may be combined
and performed by one individual in some instances.
Cont…
• For debt funding firms, financial institution had a right to
nominate director to the board in order to protect their
interest.
• A qualified and independent audit committee needs to be
established to help enhance confidence in companies
disclosures.
• A remuneration committee should be established to make
recommendations on the executive directors remuneration.
Cont…
• There are guidelines on board procedures, include in the
number of the meetings to be held.
• The companies are mandated to disclose information
including quarterly result.
• There should be discloser in the annual report about
company’s position, it’s outlook, and performance.
STRATEGIC LEADERSHIP
Strategic leadership
• It is the ability to:
 Anticipate
 Envision
 Maintain flexibility and
 Empower others to create strategic change as necessary.
• A firm’s ability to achieve a competitive advantage & earn
above-average returns is compromised when strategic leaders
fails to response appropriately & quickly to change in the
complex global competitive environment
• Strategies cannot be formulated & implemented without
effective strategic leaders
Strategic
Management
Process
Vision
Effective
strategic
leadership
Shapes the formation of
And
Mission
Influence
Successful
strategic action
Formulation of
strategies
Implementation
of strategies
Strategic
competitiveness
Above average return
Strategic Leadership Style
• Transformational Leadership entails
 Motivating followers to exceed the expectation others
have of them,
 To continuously enrich their capabilities,
 To place the interests of the organization above their own.
• Develop & communicate a vision for the organization,
formulate the strategy to achieve the vision, encourage
followers continuously
strive for higher level of
achievement.
• Transformational leaders have emotional intelligence ,so
they understand themselves well, have strong motivation,
are empathetic with others & have effective interpersonal
skill.
External Environment
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Industry structure
Rate of market growth
Number & type of competitors
Nature & degree of
political/legal constraints
• Degree to which products can
be differentiated
Characteristic of the
organization
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Size
Age
Culture
Availability of Resources
Patterns of interaction among
employees
MANAGERIAL DISCRETION
Factors
Affecting
Managerial
Discretion
Characteristic of the
manager
• Tolerance for ambiguity
• Commitment to the firm & its
desired strategic outcomes
• Interpersonal skills
• Aspiration level
• Degree of self confidence
Top Management Teams
• Composed of the key managers who are responsible
for selecting and implementing the firm’s strategies
• A heterogeneous top management team:
• Has varied expertise and knowledge
• Can draw on multiple perspectives
• Will evaluate alternative strategies
• Builds consensus
Firm Performance and Strategic Change
• Heterogeneous top management teams:
• Have difficulty in functioning effectively as a team
• Require effective management of the team to facilitate the
process of decision making
but …
• Are associated positively with innovation and strategic
change
• May force the team or members to “think outside of the
box” and be more creative
• Have greater capacity to provide effective strategic
leadership in formulating strategy
Managerial Succession
• Organizations select managers and strategic leaders
from two types of managerial labor markets:
 Internal managerial labor market: Advancement
opportunities related to managerial positions within a firm
 External managerial labor market: career opportunities
for managers in organizations other than the one for which
they currently work
Cont.…
• Advantages of internal managerial labor market
include:
 Experience with the firm and industry environment
 Familiarity with company products, markets, technologies,
and operating procedures
 Produces lower turnover among existing personnel
• Advantages of the external managerial labor market
include
 Long tenured insiders may be “stale in the saddle”
 Outsiders may bring fresh perspectives
Effect of CEO
Succession & Top
Management Team
Composition on
Strategy
Homogeneous
Managerial labor market
CEO Succession
Internal CEO
succession
Stable strategy
Ambiguous:
Possible change in
top management
team & strategy
Stable strategy with
innovation
Strategic change
Top
Management
Team
Composition
Heterogeneous
External CEO
succession
Exercise of Effective Strategic Leadership
1.
Determining Strategic Direction
• Strategic direction means the development of a long-term
vision of a firm’s strategic intent.
• A charismatic leader can help achieve strategic intent.
• It is important not to lose sight of the strengths of the
organization when making changes required by a new
strategic direction.
• Executives must structure the firm effectively to help achieve
the vision.
Determining Strategic Actions
• Developing a long term vision of the firm’s strategic intent.
• The ideal long term vision has two parts:
 Core ideology
 An envisioned future.
2. Effectively Managing the Firm’s
Resource Portfolio
• The firm’s resources are categorized as financial capital,
human capital, social capital, and organizational capital
(including organization culture).
• Effective strategic leaders manage the firm’s resource
portfolio by organizing them into capabilities, structuring the
firm into facilitate using those capabilities, and choosing
strategies through which the capabilities are successfully
leveraged to create value for customers.
Exploiting & Maintaining Core
Competencies
• In many large firms, and certainly in relateddiversified ones, core competencies are exploited
effectively when they are developed and applied
across different organizational units.
• Core competencies cannot be developed or exploited
effectively without developing the capabilities of
human capital.
• Example:- PepsiCo
Developing Human Capital and Social
Capital
• Human capital
 The knowledge and skills of the firm’s entire workforce are
a capital resource that requires investment both in training
and development and knowledge management.
• Social capital
 Relationships inside and outside the firm that help it
accomplish tasks and create value for customers and
shareholders.
• Example:- McDonald
3.
Sustaining an Effective
Organizational
Culture
• Organizational culture
 The complex set of ideologies, symbols and core values
shared through the firm, that influences the way business
is conducted
• Entrepreneurial Mind-set
 Personal characteristics that encourage or discourage
entrepreneurial opportunities
Autonomy
Proactiveness
Innovativeness
 Risk
taking
Competitive Aggressiveness
•Example:- McDonald
4.
Emphasizing Ethical Practices
• Effectiveness of processes used to implement the firm’s
strategies increases when based on ethical practices.
• Ethical practices create social capital and goodwill for the firm.
• Example:- Tata Group of Industries
Cont…
• Actions that develop an ethical organizational culture include:
 Establishing and communicating specific goals to describe
the firm’s ethical standards
 Continuously revising and updating the code of conduct
 Disseminating the code of conduct to all stakeholders to
inform them of the firm’s ethical standards and practices
 Developing and implementing methods and procedures to
use in achieving the firm’s ethical standards
 Creating and using explicit reward systems that recognize
acts of courage
 Creating a work environment in which all people are
treated with dignity
5.
Establishing Balanced Organizational
Controls
• Controls
 Formal, information-based procedures used by managers
to maintain or alter patterns in organizational activities
• Controls help strategic leaders to:
 Build credibility
 Demonstrate the value of strategies to the firm’s
stakeholders
 Promote and support strategic change
The balanced Scorecard
• Balanced Scorecard
 Framework used to verify that the firm has established
both strategic and financial controls to assess its
performance
 Prevents overemphasis of financial controls at the expense
of strategic controls
 It should translate a business unit’s mission & strategy into
tangible objectives & measures.
• Four perspectives of balanced scorecard
 Financial
 Customer
 Internal business processes
 Learning and growth
Balanced Scorecard Framework
Financial
• Cash flow
• Return on equity
• Return on assets
Customer
• Assessment of ability to anticipate
customer needs
• Effectiveness of customer service needs
• Percentage of repeat business
• Quality of communications with
customers
Internal
Business
Processes
• Asset utilization improvements
• Improvements in employee morale
• Changes in turnover rates
Learning
and
Growth
• Improvements in innovation ability
• Number of new products compared to
competitors’
• Increases in employees’ skills
Tata’s Corporate governance
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National interest
Financial reporting and records
Competition
Equal opportunities employer
Gifts and donations
Government agencies
Political non-alignment
Health, safety and environment
Quality of products and services
Corporate citizenship
Cooperation of Tata companies
Public representation of the company and the group
Integrity of data furnished
Cont…
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Third party representation
Use of the Tata brand
Group policies
Shareholders
Ethical conduct
Regulatory compliance
Concurrent employment
Conflict of interest
Securities transactions and confidential information
Protecting company assets
Protecting company assets
Citizenship
Ratan Tata Leadership Qualities
• Being able to search, understand and utilize synergies
• Knowledge of own value and uniqueness
• Ability to recognize others’ value and uniqueness
• Ability to relate, communicate and negotiate
• Solid knowledge of business and marketplace
• Big picture perspective
• Openness to ideas
• Innovation
• Willingness to look beyond oneself for capabilities and
resources
Thank You