Description
institutions affecting the way a corporation is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The PPT also talks about the Cadbury Report on CG. It also covers risk management towards the end.
? It
is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled ? It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed
? “Corporate
Governance is the system by which companies are directed and controlled…”
? “…to
do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.”
? Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993
? Cadbury Report (UK), 1992
3
? “…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
4
? Reasons
for good corporate governance in United States of America a) Market for corporate control, manifest in takeovers b) Strong legal and regulatory regimes c) Delisting of companies as a result of regulatory violation
? Reasons
for bad corporate governance in United Kingdom a) Weak market mechanisms b) Weak legal and regulatory regimes c) Delisting is a rare event d) Neither government nor government regulation has an influence on the company
? If
companies are allowed to under-invest in corporate governance, this could well lead to calls for the establishment of more prescriptive legislation, which mandates specific risk management practices, as well as compliance monitoring procedures
? It
is a report of a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures ? Published in 1992 ? Recommendations adopted in varying degree by the European Union, USA, World Bank, etc
Followed after governance failures of Maxwell, BCCI, Polly Peck, Barlow Clowes, Guinness, etc ? Set up in May 1991 by the Financial Reporting Council, London Stock Exchange and Accountancy Profession ? Suggested no major overhaul of governance structures, or massive government and regulatory interference is needed in British system ? Companies just need to follow existing models of best practices which re-emphasised the role of directors as monitors, with responsibility for ensuring that the necessary internal controls over all corporate activities were in place and functioning effectively
?
? AIRMIC
emphasized the implicit mandate for risk management in its guide for insurance and risk managers(1996) ? It obliged directors to maintain a system of internal control ? Interpretation in the form of more responsibility of Board of Directors
? CBI
expressed that the cost of compliance might be very high ? New requirements might involve additional central bureaucracy ? Board will be indulged in paperwork rather than doing something meaninhfukk
Widened the concept of internal control to address a) Business Risk Assessment and Response b) Financial Management c) Compliance with laws and regulations d) Safeguarding the assets, including the minimizing the frauds ? It stated that directors should have responsibility for all aspects of control and a duty to establish a robust system of risk management ? Welcomed by organizations like Association of British Insurers (ABI), European Confederation of Institutes of Internal Auditing, etc
?
? Chaired
by Nigel Turnbull of Rank Group ? Filled the gaps left by Cadbury & Hampel ? Primary purpose was to provide listed companies with guidance to implement the requirements in the Code relating to internal control ? Stated that continuous monitoring and auditing is required for proper internal control
?
?
? ?
?
Are we heading towards a phase when mandatory, prescriptive regulation will be the only way to ensure good corporate conduct?? A risk averse “traditional” company may adopt apt governance for the sake of its reputation, but a “newer, more risk taking” organization may not Risk taking managers are more prone to unethical behavior If the managers don?t learn that paying them exorbitant wages, without delivering a commensurate performance, can ultimately lead to their wholesale replacement, corporate governance can?t improve Government intervention is the most tried and tested way
? It
is a structured approach to manage uncertainty related to a threat, a sequence of human activities including: risk assessment, strategies development to manage it, and mitigation of risk using managerial resources ? The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk
? Causes of Risk a) Physical- Natural
b) c)
disasters or Fires,
Accidents, Death Legal- Lawsuits Financial- The variability in cash flows and market values caused by unpredictable changes in commodity prices, interest rates and exchange rates Objective of RM- To reduce different risks related to a preselected domain to the level accepted by society A prioritization process is followed- Great loss, Great probability of occurrence handled first
?
?
?
?
? ? ?
?
?
It can be used to lower the firm?s expected tax payments It can reduce the costs of financial distress and bankruptcy It can be used to encourage and protect firm specific investments It can be used to align the interests of management with those of the owners of the company It can be used to design management compensation plans that hold management accountable only for the factors under their control It can be used to assist firms in developing financial plans and funding programs It can be used to stabilize cash dividends
?
Differential treatment of interest expense & cash dividends Interest payments are tax deductible and paid from before tax, cash dividend payments are paid from after tax. Consequently, debt financing may reduce the overall after tax cost of capital to the company by creating an interest expense tax shield with the benefits accruing to the shareholders. How RM helps:: It becomes a way of reducing taxes by letting a firm borrow more money and obtain interest expense tax shields
?
?
? To
give a sense of security to the stakeholders of the firm which include its employees, managers, suppliers and customers ? A firm level RM is necessary rather than only the systematic RM at investor level
? Market
value of a company reduces because of agency cost which arises due to conflicts of interests between managers and owners ? Role of RM::Managers are exposed to total risk while shareholders are exposed to systematic risk, they will take decisions accordingly. Risk management strategies are used in conjunction with managerial performance evaluation and compensation systems to separate financial outcomes under management control from those not under their control
The noise introduced into operating cash flows and net income by volatile commodity prices, exchange rates and interest rates can be removed through risk management strategies that minimize cash flow and income variability ? Risk management can also be used to protect against disruptions in implementing a capital budget by ensuring that substantial shortfalls in internally generated funds do not occur as a result of unexpected price movements ? By stabilizing cash flows, risk management makes it possible to maintain cash dividends and smooth out the dividend cash flow stream
?
A GOOD ORGANIZATION RISK MANAGEMENT CORPORATE GOVERNANCE
? Ways
needed to be found that would discourage managers of firms facing limited investment opportunities to grow the firm at the expense of the shareholders by making negative net present value investments rather than returning cash to the shareholders ? Two ways :: Substituting Debt for Equity and Paying Cash Dividends ? It involves financial risk hence Risk Management is the means
? Risk
Management is a means of protecting the survival of the firm from failure due to unsystematic events. So, it can be seen as developments that enable managers to serve the broader societal objectives of the modern corporation ? Managers should use risk management for more than maximizing shareholder wealth; they should use it to ensure the survival of economically viable firms so as to carry out their societal role and social responsibilities
? ?
?
?
? ?
Financial Perspective Risk Management is a cure for market imperfections The existence of risk management is tied directly to the governance issues of how investors monitor, control and compensate managers so as to protect their investments in the company Social Perspective Risk Management makes a major contribution with respect to preserving the firm as a social welfare organism Accepting a broad definition of corporate governance focuses on how society is organized with economic efficiency objectives being important, but not supreme, dominates the market imperfection arguments of financial economists for risk management
QUESTIONS WELCOMED!!!
doc_108481151.pptx
institutions affecting the way a corporation is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The PPT also talks about the Cadbury Report on CG. It also covers risk management towards the end.
? It
is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled ? It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed
? “Corporate
Governance is the system by which companies are directed and controlled…”
? “…to
do with Power and Accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.”
? Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993
? Cadbury Report (UK), 1992
3
? “…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
4
? Reasons
for good corporate governance in United States of America a) Market for corporate control, manifest in takeovers b) Strong legal and regulatory regimes c) Delisting of companies as a result of regulatory violation
? Reasons
for bad corporate governance in United Kingdom a) Weak market mechanisms b) Weak legal and regulatory regimes c) Delisting is a rare event d) Neither government nor government regulation has an influence on the company
? If
companies are allowed to under-invest in corporate governance, this could well lead to calls for the establishment of more prescriptive legislation, which mandates specific risk management practices, as well as compliance monitoring procedures
? It
is a report of a committee chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures ? Published in 1992 ? Recommendations adopted in varying degree by the European Union, USA, World Bank, etc
Followed after governance failures of Maxwell, BCCI, Polly Peck, Barlow Clowes, Guinness, etc ? Set up in May 1991 by the Financial Reporting Council, London Stock Exchange and Accountancy Profession ? Suggested no major overhaul of governance structures, or massive government and regulatory interference is needed in British system ? Companies just need to follow existing models of best practices which re-emphasised the role of directors as monitors, with responsibility for ensuring that the necessary internal controls over all corporate activities were in place and functioning effectively
?
? AIRMIC
emphasized the implicit mandate for risk management in its guide for insurance and risk managers(1996) ? It obliged directors to maintain a system of internal control ? Interpretation in the form of more responsibility of Board of Directors
? CBI
expressed that the cost of compliance might be very high ? New requirements might involve additional central bureaucracy ? Board will be indulged in paperwork rather than doing something meaninhfukk
Widened the concept of internal control to address a) Business Risk Assessment and Response b) Financial Management c) Compliance with laws and regulations d) Safeguarding the assets, including the minimizing the frauds ? It stated that directors should have responsibility for all aspects of control and a duty to establish a robust system of risk management ? Welcomed by organizations like Association of British Insurers (ABI), European Confederation of Institutes of Internal Auditing, etc
?
? Chaired
by Nigel Turnbull of Rank Group ? Filled the gaps left by Cadbury & Hampel ? Primary purpose was to provide listed companies with guidance to implement the requirements in the Code relating to internal control ? Stated that continuous monitoring and auditing is required for proper internal control
?
?
? ?
?
Are we heading towards a phase when mandatory, prescriptive regulation will be the only way to ensure good corporate conduct?? A risk averse “traditional” company may adopt apt governance for the sake of its reputation, but a “newer, more risk taking” organization may not Risk taking managers are more prone to unethical behavior If the managers don?t learn that paying them exorbitant wages, without delivering a commensurate performance, can ultimately lead to their wholesale replacement, corporate governance can?t improve Government intervention is the most tried and tested way
? It
is a structured approach to manage uncertainty related to a threat, a sequence of human activities including: risk assessment, strategies development to manage it, and mitigation of risk using managerial resources ? The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk
? Causes of Risk a) Physical- Natural
b) c)
disasters or Fires,
Accidents, Death Legal- Lawsuits Financial- The variability in cash flows and market values caused by unpredictable changes in commodity prices, interest rates and exchange rates Objective of RM- To reduce different risks related to a preselected domain to the level accepted by society A prioritization process is followed- Great loss, Great probability of occurrence handled first
?
?
?
?
? ? ?
?
?
It can be used to lower the firm?s expected tax payments It can reduce the costs of financial distress and bankruptcy It can be used to encourage and protect firm specific investments It can be used to align the interests of management with those of the owners of the company It can be used to design management compensation plans that hold management accountable only for the factors under their control It can be used to assist firms in developing financial plans and funding programs It can be used to stabilize cash dividends
?
Differential treatment of interest expense & cash dividends Interest payments are tax deductible and paid from before tax, cash dividend payments are paid from after tax. Consequently, debt financing may reduce the overall after tax cost of capital to the company by creating an interest expense tax shield with the benefits accruing to the shareholders. How RM helps:: It becomes a way of reducing taxes by letting a firm borrow more money and obtain interest expense tax shields
?
?
? To
give a sense of security to the stakeholders of the firm which include its employees, managers, suppliers and customers ? A firm level RM is necessary rather than only the systematic RM at investor level
? Market
value of a company reduces because of agency cost which arises due to conflicts of interests between managers and owners ? Role of RM::Managers are exposed to total risk while shareholders are exposed to systematic risk, they will take decisions accordingly. Risk management strategies are used in conjunction with managerial performance evaluation and compensation systems to separate financial outcomes under management control from those not under their control
The noise introduced into operating cash flows and net income by volatile commodity prices, exchange rates and interest rates can be removed through risk management strategies that minimize cash flow and income variability ? Risk management can also be used to protect against disruptions in implementing a capital budget by ensuring that substantial shortfalls in internally generated funds do not occur as a result of unexpected price movements ? By stabilizing cash flows, risk management makes it possible to maintain cash dividends and smooth out the dividend cash flow stream
?
A GOOD ORGANIZATION RISK MANAGEMENT CORPORATE GOVERNANCE
? Ways
needed to be found that would discourage managers of firms facing limited investment opportunities to grow the firm at the expense of the shareholders by making negative net present value investments rather than returning cash to the shareholders ? Two ways :: Substituting Debt for Equity and Paying Cash Dividends ? It involves financial risk hence Risk Management is the means
? Risk
Management is a means of protecting the survival of the firm from failure due to unsystematic events. So, it can be seen as developments that enable managers to serve the broader societal objectives of the modern corporation ? Managers should use risk management for more than maximizing shareholder wealth; they should use it to ensure the survival of economically viable firms so as to carry out their societal role and social responsibilities
? ?
?
?
? ?
Financial Perspective Risk Management is a cure for market imperfections The existence of risk management is tied directly to the governance issues of how investors monitor, control and compensate managers so as to protect their investments in the company Social Perspective Risk Management makes a major contribution with respect to preserving the firm as a social welfare organism Accepting a broad definition of corporate governance focuses on how society is organized with economic efficiency objectives being important, but not supreme, dominates the market imperfection arguments of financial economists for risk management
QUESTIONS WELCOMED!!!
doc_108481151.pptx