1. PREPARED BY: Hardik Bakarania Jignesh Panchal Harshit Doctariyawala Ravi Panchal

2. 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

3. 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.

4. 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.

5. Agency Relationship: Owners and Managers An agency relationship exists when: Shareholders (Principals) Shareholders (Principals)

6. Agency Relationship: Owners and Managers An agency relationship exists when: Shareholders (Principals) Shareholders (Principals) Managers (Agents) Managers (Agents) Hire

7. Agency Relationship: Owners and Managers An agency relationship exists when: Shareholders (Principals) Shareholders (Principals) Managers (Agents) Managers (Agents) An Agency Relationship An Agency Relationship Hire creates

8. 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.

9. 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.

10. 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.

11. 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 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

12. 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.

13. 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.

14. 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.

15. 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.

16. Governance mechanisms Ownership Concentration Boards of Directors Executive Compensation Market for Corporate Control

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

25. STRATEGIC LEADERSHIP

26. 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

27. Effective strategic leadership Successful strategic action Mission Vision Formulation of strategies Implementation of strategies Strategic competitiveness Above average return Strategic competitiveness Above average return Strategic Management Process Shapes the formation of And Influence Yields

28. 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.

29. External Environment Industry structure Rate of market growth Number & type of competitors Nature & degree of political/legal constraints Degree to which products can be differentiated External Environment 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 Size Age Culture Availability of Resources Patterns of interaction among employees Characteristic of the organization Size Age Culture Availability of Resources Patterns of interaction among employees Characteristic of the manager Tolerance for ambiguity Commitment to the firm & its desired strategic outcomes Interpersonal skills Aspiration level Degree of self confidence Characteristic of the manager Tolerance for ambiguity Commitment to the firm & its desired strategic outcomes Interpersonal skills Aspiration level Degree of self confidence Factors Affecting Managerial Discretion

30. 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

31. 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

32. 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

33. 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

34. Stable strategy Ambiguous: Possible change in top management team & strategy Ambiguous: Possible change in top management team & strategy Stable strategy with innovation Strategic change Managerial labor market CEO Succession Internal CEO succession External CEO succession Top Management Team Composition Homogeneous Heterogeneous Effect of CEO Succession & Top Management Team Composition on Strategy

35. Exercise of Effective Strategic Leadership

36. 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.

37. 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.

38. 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.

39. Exploiting & Maintaining Core Competencies In many large firms, and certainly in related- diversified 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. Balanced Scorecard Framework Customer Financial Cash flow Return on equity Return on assets Assessment of ability to anticipate customer needs Effectiveness of customer service needs Percentage of repeat business Quality of communications with customers Learning and Growth Internal Business Processes Asset utilization improvements Improvements in employee morale Changes in turnover rates Improvements in innovation ability Number of new products compared to competitors’ Increases in employees’ skills

47. Tata’s Corporate governance 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

48. Cont… 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 Citizenship

49. 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

50. Thank You