Corporate Governance

Harinarayanan K
LLM (Corporate Law)
 Ground Rules
• Understanding Corporate Governance is impossible just
on a theoretical basis.
• So the classes will primarily provide for the theoretical
basis along with relevant examples and case studies.
• But cannot entirely cover all aspects of Corporate
Governance as they are spread across laws which
regulate companies.
Identify the people.
 Corporate Governance- Concept and Meaning
• Corporate- relating to a corporation and for our purpose a company
form of organisation. Governance- relates to how the said organisation
is run.
• Companies as we understand are run by a ‘Board of Directors’ who are
appointed by the Shareholders of the Company.
• Question: is management and governance the same thing with respect
to a company?
• Answer: Ian Tricker’s definition of Corporate Governance (1984)-
“Corporate Governance is concerned with the way corporate entities are
governed as distinct from the way business within those companies are
managed. Corporate governance addresses the issues facing Board of
Directors, such as the interaction with top management and relationships
with the owners and others interested in the affairs of the company.”
 Contd.,
• What does that mean?: Governance is related to provide vision,
goals and direction to the company. Governance relates to laying
down the policy framework, and the management works to
achieve the goals and the implementation of policies.
Management lays down the framework to ensure that the policy,
objectives and outline laid down are followed in the right
direction or in true spirit.
• In today’s business this could be seen a) in how the board is
constituted themselves which includes the non-independent
directors from management, independent directors or women
directors and b) the general separation of the decision makers are
different from those who implement them (much like Legislative
and the Executive Branch of the Government).
 Contd.,
These sentiments of separation of ownership
and control. could be traced to Adam Smith .
Here he explains-
“The directors of such companies, however,
being managers of other peoples’ money than
of their own, it cannot well be expected that
they should watch over it with the same
anxious vigilance with which the partners in a
private copartnery frequently watch over their
own”.
However this is a very primitive
understanding of Corporate Governance but
the essence of lack of vigilance transpired
into modern principles such as transparency
and accountability for the opposite reasons
forms the bedrock of modern CG.
 Some definitions
• There exists no straightjacket definition for Corporate Governance.
However all definitions provide with different facets/approaches to the
understanding of the concept.
• The difference generally lies in two forms: a) shareholder centric
approach; b) broad stakeholder centric approach.
• In category (a) we could see the definitions of Sternberg, Jensen and
Meckling and Lipton and Lorsch. Their definitions argue that the
scope of governance is related to shareholders and shareholders only.
• In category (b) we could see a much wider net as seen via the definitions
of OECD (2004), CII (1998) and SEBI (2003).
 Pillars of Corporate Governance
An overview of the definitions irrespective of who they want to include
reveal or seek to achieve the following in the process of governance. They
are,
Transparency: Ensuring timely, adequate, and accurate disclosure of all
material information. Objective is not mere fulfillment of the requirement of
law but ensuring the board’s commitment to managing the company in a
transparent manner to earn the trust of shareholders and stakeholders.
Accountability: The board of directors is accountable not only to
shareholders but to stakeholders, and executives of the company are
accountable to the board for the performance of the tasks assigned to them.
Fairness: Fair and equitable treatment to all shareowners, including
minorities, and to all participants in the corporate governance structure.
Responsibility: The board of directors and management are responsible for
their behavior and there must exist a means for penalising mismanagement.
 Theories of Corporate Governance
Corporate Governance’s understanding could be better understood using
theories related to them. The three major categories are as follows:
1. Agency theory
2. Stewardship theory
3. Stakeholder theory.
Agency theory: This is based on concept of separation of ownership and
control. The separation leads to self-interested action by those in control,
that is, the Board. But this may lead and adversely affect the performance
of the company and therefore structure of governance should be
established to safeguard the interest of shareholders. The primary
proponents of this theory are Jensen and Meckling.
 Theories of Corporate Governance
Stewardship theory: Contrary to the negative connotation of agency
theory, this theory says that when those in charge (Managers and the
Board) have their reputation on the line. Those in-charge left on their
own, will indeed act as responsible stewards of the assets they control.
These stewards believe that by working towards organizational, collective
ends, personal needs are met and their interests are aligned with those of
the corporation and its owners.
In reality a mix of both theories is ideal as there needs to be
accountability as well as flexibility in how the company should be run
and those in-charge of them.
However both these theories limited themselves as seen via the
definitions to shareholders of the said company. This is where the
stakeholder theory comes to play. But who is a stakeholder?
 Theories of Corporate Governance
Stakeholder theory: According to Freeman they are ‘any group of
individuals who are affected by or can affect the achievement of an
organisation’s objectives.’ The theory postulates that the governance of a
company should be taken at the interest of stakeholders and not limited to
just shareholders. There are three categories of stakeholders and they are,
• Internal stakeholders
• Related Stakeholders
• External Stakeholders
 Classification of Stakeholders

INTERNAL RELATED EXTERNAL

• Environment
• Creditors
• Directors Bankers • Government
•
• Employees Suppliers • Competitors
•
• Shareholders Customers • Society
• Media.
•
History and Evolution of Corporate Governance