Description
examples of scandals that shook the world, for example enron, satyam etc. It highlights the drivers of unethical strategies and business behavior. The explains the unique role of stockholders, role of board and its memebers in the corporate governance.
Strategic Management
Which company is this?
? Rise in revenue from US$13 billion to US$ 100 billion in 5 years (1996-2000) ? Returns to shareholders @ 89% per annum (2000) ? Recognized as “America’s most innovative company “ for consecutive 6 years by FORTUNE (1996-2001) ? Among “100 best companies to work for” in America
Company’s Values
RESPECT: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don't belong here. INTEGRITY: We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, we won't do it. COMMUNICATION: We have an obligation to communicate. Here, we take the time to talk with one another...and to listen. We believe that information is meant to move and that information moves people. EXCELLENCE: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.
ENRON
Scandals that shook the world…
?
Enron
?
Inflation of profit & concealment of debt through creation of Special purpose vehicles that were not consolidated
? ? ?
Corporate frauds and allegations of document shredding Market cap down from $80 billion to $268 million
WorldCom
?
Overstated EBIDTA by over $3.8 billion and booked $7 billion in expenses as capital expenditures Used questionable methods to book sales, classify assets and account debts Market cap down from $115 billion in 2000 to < $1 billion
?
?
More scandals that shook the world..
?
Tyco International
?
Evaded sales tax and used corporate funds for personal expenses of the CEO Undisclosed compensation to CEO Market cap fell by over $100 billion
? ?
?
Computer Associates:
?
Artificially inflated revenue and improperly rewarded top executives?
Tip of the Iceberg ??
And one that shook our world….
?
SATYAM
How can we forget our own Satyam ?
Billions of dollars lost in market capitalisation wiping out life savings of common man on the road
WHY ???
Drivers of Unethical Strategies & Business Behaviour
?
Overzealous pursuit of personal gain, wealth, and other selfish interests. Obsession with wealth accumulation, greed, power and status Heavy pressures on company managers to meet or beat earnings targets - to do whatever it takes to deliver good financial performance A company culture that places profits and good performance ahead of ethical behavior
?
?
Stakeholders and the Enterprise
The Unique Role of Stockholders
Stockholders are a company’s legal owners
and the provider of risk capital, a major source of capital to operate a business.
Risk capital – No guarantee to the stockholders that: ? They will recoup their investment ? Or earn a decent return ESOPs – Employee Stock Option Plans Employees may also be shareholders
Maximizing long-run profitability & profit growth is the route to maximizing returns to shareholders, as well as satisfying the claims of most other stakeholder groups.
Profitability, Profit Growth and Stakeholder Claims To grow profits, companies must be doing one or more of the following:
1. 2. 3. 4.
Participating in a market that is growing Taking market share away from competitors Consolidating the industry via horizontal integration Developing new markets through:
• Diversification • Vertical Integration • International Expansion
Stockholders receive their returns as:
? ?
Dividend payments
Capital appreciation in market value of shares
The Tripod of Corporate Governance
An Agency Relationship
Hire
and create
Agency Theory
Agency relationships arise whenever one party
delegates decision-making authority or control over resources to another.
Principal-agent relationships
? ?
Principal: person delegating authority Agent: person to whom authority is delegated
Agents and principals may have different goals. Agents may pursue goals that are not in the best interests of their principals. Agents may take advantage of information asymmetries to maximize their interests at the expense of principals. It is difficult for principals to measure performance.
The agency problem:
? ? ? ?
The Challenge for Principals
Confronted with agency problems, the challenge for principals is to:
1.
Shape the behavior of agents so that they act in accordance with goals set by principals Reduce information asymmetry between agents and principals Develop mechanisms for removing agents who do not act in accordance with goals and principals
2. 3.
Principals try to deal with these challenges through a series of governance mechanisms.
The Board is the
most significant instrument of
corporate governance
Board Composition
? ? ?
Chairman CEO Directors
? ?
Executive Non executive
?
Not less than 50% of the board to be non-executive directors
?
Independent Directors: • If the chairman executive: At least half of the board should comprise of independent directors
• If Chairman non-executive:At least one- third of the board should comprise of independent directors
Board, Chairman & CEO
?
Board’s chief role as owner-representative, is to speak for shareholders in defining and demanding operational success Board is accountable to shareholders : The Board, therefore, must connect with shareholders sufficiently to be able to speak on their behalf, define success and failure for the CEO, and ascertain and assure CEO performance The Chairman is accountable to the Board for chairing the process so that the directors fulfill their commitment. The CEO is accountable to the Board for fulfilling the board’s definition of business achievement and avoiding board’s prohibitions. The CEO and the Chairman are not accountable to the Shareholders, nor is CEO to the chairman
?
?
?
?
Directors on the Board
?
The role and responsibility of an individual director, of course, would depend upon the nature of his directorship. Broadly, there are three types of directors. Full time, executive director who is normally a paid employee of a company having some functional responsibility. Non executive but non independent director who is normally a promoter of the company or having high stakes in the company. Independent directors who are not full time directors. There is another class of directors known as nominee directors representing some interests like lending institutions etc.
? 1.
2.
3.
?
An executive director, by very nature has much more responsibilities than non executive directors. In law it is their responsibility to ensure compliance with provisions of law failing which they could be held liable as officers in default.
Who are Independent Directors
Apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;
a.
b.
is not related to promoters or management at the board level or at one level below the board;
has not been an executive of the company in the immediately preceding three financial years;
Independent Director
?
is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity. is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also;
?
?
is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.
An independent director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director..
?
Board’s key functions
? ?
Strategy formulation, budgets, business plans, etc. Monitoring the effectiveness of the company’s governance practices;. Selecting, compensating, monitoring key executives and overseeing succession planning.
?
?
?
Executive and board remuneration;
Ensuring a formal and transparent board nomination and election process.
Board’s key functions
?
Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, ensuring control systems for risk management, financial and operational control, and compliance.
Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions. Overseeing the process of disclosure and communications.
?
?
Functions of the Chairman
?
To set standards and ensure that policies and practices are in place.
?
To ensure that the directors make good decisions.
To make sure that directors are continuously upgraded to the levels required by investors to meet the current and future needs of the company. To act decisively in times of crisis To act as a representative of the company.
?
? ?
Functions of the CEO
•
?
? ?
To assist the executive directors in formulating strategic proposals that have to be endorsed by the board.
To provide leadership and direction to all his executive directors. To develop a plan for implementing the strategy formulated by the board and/or management, and to convince the non-executive directors that the strategy can work. To act as representative of the executive directors when interacting with the non-executive directors. To present the company to major investors, the media and government. To be a source of inspiration, leadership and direction to the employees, customers and suppliers. To be able to identify the situations that requires intervention.
? ?
?
?
Role of Independent Directors
* Contribute to and constructively challenge development of company strategy.
* Scrutinize management performance. * Satisfy them that financial information is accurate and ensure that robust risk management is in place. * Review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. of committees).
Governance Mechanisms
Governance mechanisms serve to limit the agency problem by aligning incentives between agents and principals and
by monitoring and controlling
agents.
Governance Mechanisms
Ownership Concentration (a)
?
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
?
Governance Mechanisms
Ownership Concentration (b)
?
The increasing influence of institutional owners (stock mutual funds and pension funds)
?
Have the size (proxy voting power) and incentive (demand for returns to funds) to discipline ineffective toplevel managers Can affect the firm’s choice of strategies
?
Governance Mechanisms
Ownership Concentration Board of Directors (a)
?
Board has the power to:
?
Direct the affairs of the organization
?
?
Punish and reward managers
Protect owners from managerial opportunism
Governance Mechanisms
Ownership Concentration Board of Directors (b)
?
Composition of Boards:
?
Insiders: the firm’s CEO and other top-level managers Related Outsiders: individuals uninvolved with day-to-day operations, but who have a relationship with the firm Outsiders: individuals who are independent of the firm’s day-to-day operations and other relationships Board’s committees • Audit committee • Remuneration committee • Nomination committee
?
?
?
Governance Mechanisms
Ownership Concentration Board of Directors (c)
?
Enhancing the effectiveness of boards and directors:
?
More diversity in the backgrounds of board members Stronger internal management and accounting control systems More formal processes to evaluate the board’s performance Adopting a “lead director” role Changes in compensation of directors
?
?
? ?
Governance Mechanisms
Ownership Concentration
?
Forms of compensation:
?
Salary, bonuses, long-term performance incentives, stock awards, stock options
Board of Directors
Executive Compensation
Governance Mechanisms
Ownership Concentration
?
Individuals and firms buy or take over undervalued corporations
?
Ineffective managers are usually replaced in such takeovers
Board of Directors
?
Threat of takeover may lead firm to operate more efficiently
Executive Compensation Market for Corporate Control (a)
doc_106244977.pptx
examples of scandals that shook the world, for example enron, satyam etc. It highlights the drivers of unethical strategies and business behavior. The explains the unique role of stockholders, role of board and its memebers in the corporate governance.
Strategic Management
Which company is this?
? Rise in revenue from US$13 billion to US$ 100 billion in 5 years (1996-2000) ? Returns to shareholders @ 89% per annum (2000) ? Recognized as “America’s most innovative company “ for consecutive 6 years by FORTUNE (1996-2001) ? Among “100 best companies to work for” in America
Company’s Values
RESPECT: We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance don't belong here. INTEGRITY: We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, we won't do it. COMMUNICATION: We have an obligation to communicate. Here, we take the time to talk with one another...and to listen. We believe that information is meant to move and that information moves people. EXCELLENCE: We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.
ENRON
Scandals that shook the world…
?
Enron
?
Inflation of profit & concealment of debt through creation of Special purpose vehicles that were not consolidated
? ? ?
Corporate frauds and allegations of document shredding Market cap down from $80 billion to $268 million
WorldCom
?
Overstated EBIDTA by over $3.8 billion and booked $7 billion in expenses as capital expenditures Used questionable methods to book sales, classify assets and account debts Market cap down from $115 billion in 2000 to < $1 billion
?
?
More scandals that shook the world..
?
Tyco International
?
Evaded sales tax and used corporate funds for personal expenses of the CEO Undisclosed compensation to CEO Market cap fell by over $100 billion
? ?
?
Computer Associates:
?
Artificially inflated revenue and improperly rewarded top executives?
Tip of the Iceberg ??
And one that shook our world….
?
SATYAM
How can we forget our own Satyam ?
Billions of dollars lost in market capitalisation wiping out life savings of common man on the road
WHY ???
Drivers of Unethical Strategies & Business Behaviour
?
Overzealous pursuit of personal gain, wealth, and other selfish interests. Obsession with wealth accumulation, greed, power and status Heavy pressures on company managers to meet or beat earnings targets - to do whatever it takes to deliver good financial performance A company culture that places profits and good performance ahead of ethical behavior
?
?
Stakeholders and the Enterprise
The Unique Role of Stockholders
Stockholders are a company’s legal owners
and the provider of risk capital, a major source of capital to operate a business.
Risk capital – No guarantee to the stockholders that: ? They will recoup their investment ? Or earn a decent return ESOPs – Employee Stock Option Plans Employees may also be shareholders
Maximizing long-run profitability & profit growth is the route to maximizing returns to shareholders, as well as satisfying the claims of most other stakeholder groups.
Profitability, Profit Growth and Stakeholder Claims To grow profits, companies must be doing one or more of the following:
1. 2. 3. 4.
Participating in a market that is growing Taking market share away from competitors Consolidating the industry via horizontal integration Developing new markets through:
• Diversification • Vertical Integration • International Expansion
Stockholders receive their returns as:
? ?
Dividend payments
Capital appreciation in market value of shares
The Tripod of Corporate Governance
An Agency Relationship
Hire
and create
Agency Theory
Agency relationships arise whenever one party
delegates decision-making authority or control over resources to another.
Principal-agent relationships
? ?
Principal: person delegating authority Agent: person to whom authority is delegated
Agents and principals may have different goals. Agents may pursue goals that are not in the best interests of their principals. Agents may take advantage of information asymmetries to maximize their interests at the expense of principals. It is difficult for principals to measure performance.
The agency problem:
? ? ? ?
The Challenge for Principals
Confronted with agency problems, the challenge for principals is to:
1.
Shape the behavior of agents so that they act in accordance with goals set by principals Reduce information asymmetry between agents and principals Develop mechanisms for removing agents who do not act in accordance with goals and principals
2. 3.
Principals try to deal with these challenges through a series of governance mechanisms.
The Board is the
most significant instrument of
corporate governance
Board Composition
? ? ?
Chairman CEO Directors
? ?
Executive Non executive
?
Not less than 50% of the board to be non-executive directors
?
Independent Directors: • If the chairman executive: At least half of the board should comprise of independent directors
• If Chairman non-executive:At least one- third of the board should comprise of independent directors
Board, Chairman & CEO
?
Board’s chief role as owner-representative, is to speak for shareholders in defining and demanding operational success Board is accountable to shareholders : The Board, therefore, must connect with shareholders sufficiently to be able to speak on their behalf, define success and failure for the CEO, and ascertain and assure CEO performance The Chairman is accountable to the Board for chairing the process so that the directors fulfill their commitment. The CEO is accountable to the Board for fulfilling the board’s definition of business achievement and avoiding board’s prohibitions. The CEO and the Chairman are not accountable to the Shareholders, nor is CEO to the chairman
?
?
?
?
Directors on the Board
?
The role and responsibility of an individual director, of course, would depend upon the nature of his directorship. Broadly, there are three types of directors. Full time, executive director who is normally a paid employee of a company having some functional responsibility. Non executive but non independent director who is normally a promoter of the company or having high stakes in the company. Independent directors who are not full time directors. There is another class of directors known as nominee directors representing some interests like lending institutions etc.
? 1.
2.
3.
?
An executive director, by very nature has much more responsibilities than non executive directors. In law it is their responsibility to ensure compliance with provisions of law failing which they could be held liable as officers in default.
Who are Independent Directors
Apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;
a.
b.
is not related to promoters or management at the board level or at one level below the board;
has not been an executive of the company in the immediately preceding three financial years;
Independent Director
?
is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity. is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also;
?
?
is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.
An independent director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director..
?
Board’s key functions
? ?
Strategy formulation, budgets, business plans, etc. Monitoring the effectiveness of the company’s governance practices;. Selecting, compensating, monitoring key executives and overseeing succession planning.
?
?
?
Executive and board remuneration;
Ensuring a formal and transparent board nomination and election process.
Board’s key functions
?
Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, ensuring control systems for risk management, financial and operational control, and compliance.
Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions. Overseeing the process of disclosure and communications.
?
?
Functions of the Chairman
?
To set standards and ensure that policies and practices are in place.
?
To ensure that the directors make good decisions.
To make sure that directors are continuously upgraded to the levels required by investors to meet the current and future needs of the company. To act decisively in times of crisis To act as a representative of the company.
?
? ?
Functions of the CEO
•
?
? ?
To assist the executive directors in formulating strategic proposals that have to be endorsed by the board.
To provide leadership and direction to all his executive directors. To develop a plan for implementing the strategy formulated by the board and/or management, and to convince the non-executive directors that the strategy can work. To act as representative of the executive directors when interacting with the non-executive directors. To present the company to major investors, the media and government. To be a source of inspiration, leadership and direction to the employees, customers and suppliers. To be able to identify the situations that requires intervention.
? ?
?
?
Role of Independent Directors
* Contribute to and constructively challenge development of company strategy.
* Scrutinize management performance. * Satisfy them that financial information is accurate and ensure that robust risk management is in place. * Review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. of committees).
Governance Mechanisms
Governance mechanisms serve to limit the agency problem by aligning incentives between agents and principals and
by monitoring and controlling
agents.
Governance Mechanisms
Ownership Concentration (a)
?
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
?
Governance Mechanisms
Ownership Concentration (b)
?
The increasing influence of institutional owners (stock mutual funds and pension funds)
?
Have the size (proxy voting power) and incentive (demand for returns to funds) to discipline ineffective toplevel managers Can affect the firm’s choice of strategies
?
Governance Mechanisms
Ownership Concentration Board of Directors (a)
?
Board has the power to:
?
Direct the affairs of the organization
?
?
Punish and reward managers
Protect owners from managerial opportunism
Governance Mechanisms
Ownership Concentration Board of Directors (b)
?
Composition of Boards:
?
Insiders: the firm’s CEO and other top-level managers Related Outsiders: individuals uninvolved with day-to-day operations, but who have a relationship with the firm Outsiders: individuals who are independent of the firm’s day-to-day operations and other relationships Board’s committees • Audit committee • Remuneration committee • Nomination committee
?
?
?
Governance Mechanisms
Ownership Concentration Board of Directors (c)
?
Enhancing the effectiveness of boards and directors:
?
More diversity in the backgrounds of board members Stronger internal management and accounting control systems More formal processes to evaluate the board’s performance Adopting a “lead director” role Changes in compensation of directors
?
?
? ?
Governance Mechanisms
Ownership Concentration
?
Forms of compensation:
?
Salary, bonuses, long-term performance incentives, stock awards, stock options
Board of Directors
Executive Compensation
Governance Mechanisms
Ownership Concentration
?
Individuals and firms buy or take over undervalued corporations
?
Ineffective managers are usually replaced in such takeovers
Board of Directors
?
Threat of takeover may lead firm to operate more efficiently
Executive Compensation Market for Corporate Control (a)
doc_106244977.pptx