Corporate Governance, Bank Boards & Directors

1. Corporate Governance, Bank Boards & Directors ______________________________ Ashish shah

2. Overview of Corporate Governance

3. SomeDefinitions • “Corporate Governance is the system by which companies are directed and controlled…” • Cadbury Report (UK), 1992 • “…to do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.” • Sir Adrian Cadbury, inReflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993

4. An Indian Definition • “…fundamental objective of corporate governance is the ‘enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.” • SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000

5. A Gandhian Definition • Trusteeship obligations inherent in company operations, where assets and resources are pooled and entrusted to the managers for optimal utilisation in the stakeholders’ interests.

6. Some Further Definitions Corporate governance is essentially about leadership: • leadership for efficiency; • leadership for probity; • leadership with responsibility; and • leadership which is transparent and which is accountable. - PRINCIPLES FOR CORPORATE GOVERNANCE IN THE COMMONWEALTH

7. What is Corporate Governance? • The Manner in which a Corporation is Run • Achieving its Objectives • Transparency of its Operations • Accountability & Reporting • Good Corporate Citizenship • The Processes & Operating Relationships that Best Achieve Organisational Goals

8. Some Governance Models • Finance or the Principal-Agent Model • Markets for Capital, Managerial Talent and Corporate Control, Key determinant • In general, profit-maximisation goal is co-functional with social-welfare-maximisation • Shareholders as Residual Claimants have superior control rights

9. Exclusive Accountability toShareholders • Risk-bearing Entrepreneurs • Residual Claimants • Winding-up Ranking: Last in Pecking Order • Boards Appointed by Shareholders • Non-congruence of Stakeholder Interests

10. Residual Claimant Theory • “…shareholders … residual claimants to the firm’s income. Creditors have fixed claims and employees’ remunerations … negotiated in advance of performance .. Gains and losses from abnormally good or bad performance .. The lot of shareholders, who stand last in the queue .. Shareholders make discretionary decisions and bear consequences .. As such, .. Owners of business with important control rights…” • The Economic Structure of Corporate Law, Frank H Easterbrook and Daniel R Fischel (1991) OUP

11. The Stakeholder Case • Firm Objective must be defined more widely than just shareholder-value-maximisation, since risk capital is not the only, or even the major input • Residual Claimant Rights Not Universally Valid, eg, Circumscribed in case of pre-bankruptcy (US Chapter XI) Situations • Other Such: Employees with Firm-specific Specialised Skills, Customers/Vendors with Substantial Stake in the Business, etc

12. Towards an Integrated Model • One-Size does not Fit All Circumstances • A Combination of Shareholder/Stakeholder Models Necessary • Some Argue, While Shareholder Claim Well Established, Stakeholder Claims Need to be Proved • Tailor Model to Suit Unique Circumstances

13. The Corporate Board • Central to Corporate Governance • Juxtaposed between Shareholders on the one hand, and on the other, Managers of the Entity (Cadbury) • Follows Distancing between Ownership and Control (Berle and Means) • Trustee for All Shareholders • Loyalty & Commitment – Always to Company

14. Board Role & Responsibility • Provide/ Exercise • Leadership and Strategic Guidance • Objective Judgement Independent of Management • Control over the Company • Direct and Control the Management of the Company • Be Accountable at all times to All Shareholders

15. Dimensions of Board Responsibility • Direction involves • Formulation & Review of Company Policies, Strategies, Budgets and Plans, Risk Management Policies, Top Level HR Policies, etc • Setting Objectives & Monitoring Performance • Oversight of Acquisitions, Divestitures, Projects, Financial and Legal Compliance, etc

16. Dimensions of Board Responsibility • Control Involves • Prescribing Codes of Conduct, • Overseeing Disclosure & Communication Processes, • Ensuring Control Systems to Protect Company Assets • Reviewing Performance & Realigning Action Initiatives to Achieve Company Objectives

17. Dimensions of Board Responsibility • Accountability Involves • Creating, Protecting and Enhancing Company Wealth and Resources • Timely and Transparent Reporting • Good Corporate Citizenry including Discharge of Stakeholder Obligations and Societal Responsibilities without Compromising the Shareholder Wealth Maximisation Goal

18. Corporate Governance & Capital Market Drivers: A Conceptual Framework REGULATION & LEGISLATION Regulators Government Stock Exchanges (SEBI/RBI) Legislation Listing Agreements Listed Corporations (The Board & the Executive) Shareholders/ Stakeholders Lenders (Banks/ Depositors) Market Operators Institutional Investors Press/Media (Rewards) (Pension Funds/Insce Cos) (Opinion Makers) Market Operations, Critique & Monitoring

19. Is ThereMore to Business than just theFinancial Numbers?

20. An Enterprise’s Triple Effect on Society Sustainable Development Equal Opportunities Waste Control Education & Culture Social Emissions Community Regeneration Environment Business Impact Energy Use Human Rights Product Employee Life-cycle Volunteers Economic Product Wealth Productive Ethical Value Generation Employment Trading

21. The Triple-Bottomline Impact economics Business Impact environment society

22. Governance Orientation Matrix

23. Governance Orientation & Sustainable Profits

24. Thanks for Your Attention