Governance

The rise of integrated reporting and increased investor focus on extra-financial factors are part of a new global attitude toward business. One example of this trend is provided by research from Ceres, an advocacy organization for sustainability leadership, into the evolution of sustainability practice in companies (Ceres, 2014; Ceres & Ramani, 2015).

To understand what makes some companies more useful when it comes to delivering sustainability performance without sacrificing mission, Ceres focused its studies on how boards and directors provide oversight for sustainability. Their research discovered that by making both executives and governing boards formally accountable for sustainability performance, organizations can face the increasing pressure to deliver on sustainability and maintain social mission.

Governance practices can provide a framework for building mission into the DNA of organizations. To take this inquiry further, more research is needed to capture current learning across sectors and to identify mission-supportive governance practice as it evolves. Sharing this information with budding social entrepreneurs, MBA students and investors, to increase their understanding of governance as a solution to mission challenges, could help develop more sophisticated attitudes toward the role of governance across the sector.

Additionally, more research into Mission monitoring that makes use of metrics and enables governing boards and managers to evaluate mission alongside financial performance and deliver oversight and accountability in both areas is needed. Investor engagement is another area where more research could be beneficial.

As the sector continues to expand into the mainstream, new investors will be joining the boards of growing social entrepreneurships and exerting their influence. More work on how the leaders of these organizations can create proactive strategies to identify investors who align with the mission and negotiate favorable terms for mission preservation would be welcome.

More research into how investor behavior, and the impact that has on mission preservation, could yield clues as to why so many businesses find mission pushed to the margins as they grow. There is also room for developing practical resources to help social entrepreneurships establish effective investor engagement and communication strategies.

As the sector matures, finding the right people remains challenging for organizations in the hectic scaling stage. More extensive use of skills matrices—and matrices developed especially for mission-driven businesses—could help. A specialist referral service, online skills bank or recruiting agency could be established to connect organizations with appropriate candidates.

Corporate governance involves a set of relationships amongst the company’s management, its board of directors, its shareholders, its auditors and other stakeholders. These relationships, which involve various rules and incentives, provide the structure through which the objectives of the company are set, and the means of attaining these objectives as well as monitoring performance are determined. Thus, the key aspects of good corporate governance include transparency of corporate structures and operations; the accountability of managers and the boards to shareholders; and corporate responsibility towards stakeholders.

The principal stakeholders are the shareholders/members, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e. g. , banks, bond holders), suppliers, regulators, and the community at large. In a broader sense, however, good corporate governance- the extents to which companies are run in an open and honest manner- is important for overall market confidence, the efficiency of capital allocation, the growth and development of countries’ industrial bases, and ultimately the nations’ overall wealth and welfare.

An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. Issues involving corporate governance principles include:

•  Internal controls and internal auditor
• The independence of the entity’s external auditors and the quality of their audits
• Oversight of the preparation of the entity’s financial statements
• Review of the compensation arrangements for the chief executive officer and other senior executives

The need for corporate governance is not something typical to our country or economy. Even in the countries where regulatory mechanisms are more demanding in their content and more vigilant in their implementation, flagrant violations under the veil of corporate impenetrability have generated a strident demand for better governance.

The advent of the information age has created an awakened shareholder, vigilant public and an almost predatory journalistic fervor. Depending upon the model of corporate disclosure followed by different legal frameworks, the right to information has forced corporate to divulge more than they ever did. The following definition should help us to understand the concept better: “Corporate Governance is not just corporate management; it is something much broader to include a fair efficient and transparent administration to meet certain well defined objectives. Read about Corporate Governance at Wipro

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors employees customers and suppliers, and comply with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practiced under a well laid out system, it leads to building of a legal, commercial and institutional framework and democrats the boundaries within which these functions are performed.

DEFINITION OF CORPORATE GOVERNANCE

There is no universal definition of Corporate Governance.

However some of the definitions of Corporate Governance are given herein below:- “Corporate Governance is the system by which companies are directed and controlled” Sir Adrian Cadbury, UK Combined Code “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. ” “Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. ” OECD Corporate Governance Principles, 2004

“Corporate Governance is about promoting Corporate fairness, transparency and accountability. ” James D Wolfensohn, President of World Bank “…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 “The way a Company is organized and managed to ensure that all financial stakeholders (Shareholders and Creditors) receive their fair share of a Company’s earnings and assets. ”

Standard & Poor’s

ICSI has also defined the term Corporate Governance as under: “Corporate Governance is the application of best management practices, compliances of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders” The Principles of Corporate Governance evolved by the ICSI are as under:- Sustainable development of all stakeholders – To ensure growth of all individual associate with or effected by the enterprise on sustainable basis.

Effective management and distribution of wealth – To ensure that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all stakeholders and enhancing its wealth creation capabilities to maintain sustainability. Discharge of social responsibility – To ensure that enterprise is acceptable to the society in which it is functioning. Application of best management practices – To ensure excellence in functioning of enterprises and optimum creation of wealth on sustainable basis.

Compliance of law in letter and spirit – To ensure value enhancement for all stakeholders guaranteed by the law for maintaining socio-economic balance. Adherence to ethical standards – To ensure integrity, transparency, independence and accountability in dealings with all stakeholders NEED FOR CORPORATE GOVERNANCE

• 1. A corporation is a congregation of various stakeholders, namely, customers, employees, investors, vendor partners, government and society. A corporation should be fair and transparent to its stakeholders in all its transactions.

This has become imperative in today’s globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed.

• 2. Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action.

Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders.

• 3. Corporate governance is beyond the realm of law. It stems from the culture and mindset of management, and cannot be regulated by legislation alone.

Corporate governance deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability. What legislation can and should do, is to lay down a common framework – the “form” to ensure standards. The “substance” will ultimately determine the credibility and integrity of the process. Substance is inexorably linked to the mindset and ethical standards of management.

• 4. Corporations need to recognize that their growth requires the cooperation of all the stakeholders; and such cooperation is enhanced by the corporation adhering to the best corporate governance practices.

In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders.

• 5. Corporate governance is a key element in improving the economic efficiency of a firm.

Good corporate governance also helps ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate. Further, it ensures that their Boards are accountable to the shareholders. This, in turn, helps assure that corporations operate for the benefit of society as a whole. While large profits can be made taking advantage of the asymmetry between stakeholders in the short run, balancing the interests of all stakeholders alone will ensure survival and growth in the long run.

This includes, for instance, taking into account societal concerns about labor and the environment.

• 6. The failure to implement good governance can have a heavy cost beyond regulatory problems.

Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets. In fact, recently, stock market analysts have acquired an increased appreciation for the correlation between governance and returns.

In this regard, an increasing number of reports not only discuss governance in general terms, but also have explicitly altered investment recommendations based on the strength or weakness of a company’s corporate governance infrastructure.

• 7. The credibility offered by good corporate governance procedures also helps maintain the confidence of investors – both foreign and domestic – to attract more “patient”, long-term capital, and will reduce the cost of capital.

This will ultimately induce more stable sources of financing.

• 8. Often, increased attention on corporate governance is a result of financial crisis.

For instance, the Asian financial crisis brought the subject of corporate governance to the surface in Asia. Further, recent scandals disturbed the otherwise placid and complacent corporate landscape in the US. These scandals, in a sense, proved to be serendipitous. They spawned a new set of initiatives in corporate governance in the US and triggered fresh debate in the European Union as well as in Asia. The many instances of corporate misdemeanours have also shifted the emphasis on compliance with substance, rather than form, and brought to sharper focus the need for intellectual honesty and integrity.

This is because financial and non-financial disclosures made by any firm are only as good and honest as the people behind them. By this very principle, only those industrialists whose corporations are governed properly should be allowed to be a part of committees.

The Corporate Governance is governed by The Companies Act, 1956: The powers and duties of Board of Directors as per the Companies Act, 1956 for better Corporate Governance are as follows:

1. Section 291 of Companies Act, General Powers Board is entitled to exercise all such powers and do all such acts and things, subject to the provisions of the Companies Act, as the company is authorized to exercise and do. However, the Board shall not exercise any power which is required whether by the Act or by the memorandum or articles of the company or otherwise to be exercised or done by the company in general meeting.
2. Power of the individual directors – Unless the Act or the articles otherwise provide, the decisions of the Board are required to be the majority decisions only. Individual directors do not have any general powers.

Essay Questions (100 Points)

• Do you feel the extent of shareholders’ participation in the election of directors is limited to the rubber-stamp process of affirmation?

Explain the given statement. Actually, shareholders have limited power during the election process even though they are empowered by the statues to elect directors to oversee management. Even if the majority of shareholders oppose a corporate sponsored nominee, the person will still be elected as director.

CEOs and the board had controlled the power to the nomination and election process until very recently. The independent directors in the nominating committee has provided some structure to the nomination and election process even though those directors still serve at the will of the CEOs and other executive directors.

• Elaborate on the following statement:

“In modern corporations, particularly in the era of technological advances, labor resources are becoming an important part of corporate governance as capital resources. Employee participation is essential to corporate governance; it influences employee cooperation in the implementation of company decisions as well as the effectiveness of managerial control and authority. Employees of a firm have made firm-specific investments such as retirement funds and pension funds. Those investment are tied to the company’s stock, thus their incentives to participate in corporate governance are greater. Given more outside opportunities, employees with valuable human capital can easily leave the firm.

One possible way is allowing employees to participate in corporate decision-making and to share in the corporate surplus through flexible wages, shared ownership and other mechanisms. As such, corporate government system should give adequate attention to employees if the firms are to survive in an increasingly competitive environment.

• Discuss shareholders’ participation in monitoring their companies’ affairs, decisions, and corporate governance.

Shareholders should be held accountable for monitoring the operations and management of the business with which they hold an investment. While keeping track of day-to-day processes can prove difficult, shareholders ranging from large institutional investors to small retail investors have an obligation to monitor the governance and performance as a result from management decisions. Shareholders should also try to understand the culture in order to have a better understanding of management’s governance and the risk controls that exist within.

If shareholders grow displeased with the governance and management of the company, they can voice their displeasure by selling their shares.

• Describe how shareholder proposals can influence corporate governance.

Shareholder proposals can impact corporate governance if a structure is established where board members are required to consider each proposal. Usually, board members want to maintain maximum flexibility and typically avoid these kind of constraints.

However, the use of proxy voting has changed this a little bit. 5. Explain the advantages of employee participation in corporate governance. Employee participation in corporate governance is important as it provides an extra layer of checks and balances within the governance of a company which can lead to exposing misconduct or illegal actions. Also, allocating ownership of stock to employees, the interests of the employee and shareholder become aligned for the greater good and growth of the company.

Information governance is generally the act of storing, protecting and integrating data acquired from different sources. Efficient maintenance of the stored health care data provides space for health institutions to create a friendly atmosphere with the patients, individualize treatments,improve communication levels and thus health outcomes.

Electronic health records (EHR) technology, which records and stores patients’ information electronically, helps the healthcare administrators to consolidate, centralize and securely get in touch with patients’ data. This technology has become helpful in information governance system because it enhance a comprehensive knowledge about the patient and enables personalized interactions by integrating patients’ data from all required sources.

Health analysts play a key role in the data management system by providing insightful knowledge from patterns and correlations on healthcare data. From this, one can deduce a health problem that mainly affects a certain age group, hence elevate population health results through tracking present health trends and foresee upcoming ones.

The incorporation of mobile health tools and patients’ portals in the health data management systems has made it easier for the patients to interact with the healthcare personnel. The personal interaction between the physician and the patient has enhanced the privacy level, which every patient desires.Information about a physician derived from claims data enables a healthcare management system to deduce his or her behavior and decide on the physician’s placement area.

By understanding the physician’s area of specialization in a certain department and assigning him to his specialty it will lead to increase in volume of the referral rates hence high revenue income.Physicians and healthcare management personnel ought to be very keen when collecting patients’ data and marketing department need to focus on creating awareness on stabilizing data management systems.

Knowledgeable and impactful business decisions based on the provided data will be attained due to the involvement of every party in the healthcare sector.

estructuring is rife once again in our organizations. Is all this really necessary or are we Just getting it very wrong? Do we keep designing in the traditional and two dimensional way we have always designed our organizations in? Let us rethink why we would restructure in the first place and how we would do it in a way that is more sustainable and less disruptive to the organization. Let’s start with some simple ideas and principles. Include organization design as part of your strategic planning process. When your business model or value chain changes, your overall structure needs to change with it.

For other times, accountabilities and roles need to continually evolve. Create broad roles that can evolve, not tightly defined Jobs. Remember we frequently encounter problems beyond our Job descriptions and we need to develop people so they can be redeployed. When you restructure, change the way the work is done or there will be no change. Functions focused on effectiveness cannot report to functions focused on efficiency Functions focused on long-range development cannot report to functions focused on short-range results Having the wrong people in the wrong roles will continue to make the structure ineffective.

Understand that there will always be paradoxes in the system like centralization AND decentralization and learn to manage it through behavior rather than structure. No amount of restructuring can make up for leadership and culture failures. Restructures often don’t change power structures. People like creating extra layers to serve their own agendas. Do not allow it if the business model and value chain does not require it. Let’s improve how we do things using 4 fundamentals. 1 .

Job families based on the value chain – broken down into core and support The first step is to design value chain based Job families – a Job family is a cluster of roles that have a lot in common as far as competencies and outputs are concerned. Identify the core functions that must be performed in support of the business strategy. Define what each function will have authority and be accountable for. Once his is clear, support Job families can be defined. Examples are Finance, Human Resources and Operations. Support should never be greater than core. . Levels of work Now define the right number of levels. The starting point, says Jacques, is “to get the right structure, including the right number of vertical layers, and well-defined accountability and authority not only in manager-subordinate working relationships, but in cross-functional working relationships as well” Oases, “The Aims of Requisite Organization,” in Requisite Organization). All roles in a level have a similar approach to work, and a similar level of complexity, regardless of the business unit or Job family they fall into.

This paves the way for clear goal alignment. You should not have more than 5-6 levels of work in total for example Operational employees, First line leaders, Expert leaders, Executive Leaders and Strategic leader(s). 3. Systems thinking to get governance and matrix structures right Now make sure you put the governance , organization support and matrix structures over it that can manage the accountabilities and risk appetites of your functions and ensure you understand where to place resources between core and support and between central and decentralized functions. . Generic roles, not people And very importantly… When creating the structure, ignore the people involved and just identify the core and support business functions that must be performed. Create generic roles that are not person dependent and can evolve. Have similarities in role design across levels and in Job families and only define the unique bits differently. This makes it much easier to redeploy people instead of making them redundant whilst growing other parts of the business.

The ensuing picture looks like this: If we evolve the picture further to incorporate the matrix and governance designs the final design will look something like a three dimensional matrix using the Biometric design developed by DRP. Elisabeth Dossal: If you need help in developing a sustainable well-designed organization structure, please contact me on marianne@redstonecp. Com.

At a basic level, It Involves allocating the right Inventory to the right customer at the right price. This is also known as yield management. In the Indian context application of revenue management can be seen in many fields.

Travel and Tourism:

• Advance purchase of tickets offered by airlines
• Weekend discount by hotels
• Attack service by Indian Railways Different tariffs charged by power generation and distribution companies
• Software companies Revenue management has been named as the “number one emerging business strategy’ by the Wall Street Journal.

Application of management science models based on linear programming has improved the contribution to profit for a major steel company (Data Steel) in India by $73 million In 1986-87 and given a cumulative Earnings Management It covers a wide variety of legitimate and illegitimate actions by management that affects the earnings of a company. It is strategy used by the management to elaborately manipulate the company’s earnings in order to smooth earnings over two or more interim or accrual accounting periods or to achieve a designated earnings level to meet security analysts’ forecasts.

Companies prefer to smooth earnings in contrast to having years of exceptionally good or bad earnings. It includes legitimate discretionary choices of when to enter into transactions that require accounting recognition, adding a product line, selling a division, decreasing expenditures. For example, implementation of a decision to enhance the entity’s credit and collection activities may legitimately support reducing the estimate of bad bet expense. Abusive earnings management is deemed by the Securities & Exchange Commission to be “a material and intentional misrepresentation of results”.

This is the case when the management circumvents GAP in an effort to influence reported earnings. Accounting records may be falsified, all the legal liabilities may not be reported, and fictitious transactions may be entered. In many cases, leadership is responsible for employing techniques to manage and smooth earnings. It should however, be noted that earnings management that constitutes fraud is distinctly different from earnings management perceived to reduce the laity of earnings.

While the pure-fraud cases are to be dealt with through criminal law, issues such as earnings management are also to be dealt with through stringent provisions securities regulation and corporate governance norms. The current evidence indicates a greater incidence of the former type of cases rather than the latter, but beyond a point the distinction between the two gets somewhat blurred (as in Satyr’s case) and hence caution must be exercised to prevent both types of occurrences. A major area of concern regarding practice of earnings management is the effect it has on destabilize the stock markets.

Motives The major drivers which motivate the management to resort to techniques of earnings management may be discussed as follows:

• Achieve targeted results
• Emphasis on quarterly reporting
• Analyst recommendations
• High expectation of shareholders
• Performance based pay and stock options
• Pressure on Board of Directors and top management to showcase their leadership Instruments

Some common techniques of revenue management are described below: Vendor financing occurs when a company loans money to a company to a customer to purchase goods from the company. The result is increase in sales revenue on the income statement and an increase in notes receivables on the Balance Sheet. The increase in revenues improves earnings and the related ratios that have operating industries such as telecommunications. For example, in early 2000, Motorola loaned more than $ 2 billion via vendor financing to Titles, a Turkish telecommunication company. Subsequent to the financing, Titles defaulted on the principal and interest payments, forcing Motorola to write off the receivable and recognize a loss.

The concern here is that financial analysis and subsequent decisions made about a many based on the current period revenues and earnings are immediately distorted.  Booking a Sale before its time Another way of increasing revenues is to record sales in the accounting records before they are earned. One technique is stuffing the sales channel. Managers ship inventory to customers and recorded the corresponding revenues in spite of clauses of returning the goods without cause beyond year end. Another commonly used technique is to record the sale and leave the delivery date open for the customer.

Not reducing sales for promised rebates is yet another instrument of revenue management. Revenue can also be increase by shipping and recording as a sale goods delivered on consignment. Companies in the service industry frequently resort to revenue management. Software support and maintenance contracts, engineering updates, equipment maintenance contracts, and other may call for a long-term agreement between the service provider and customer. In order to increase revenues a service provider may record as revenue the entire or a substantial portion of the contract in the first year.

Many internet retailers and advertising agencies use the gross method of recording revenues. Under the gross approach, revenues collected and the cost of the ticket are recorded separately, thus creating an appearance of high revenue business. Earnings are generally managed by selecting the amount and time period an expense is recorded on the income statement. Commonly used techniques may be describes as follows: Cookie Jars. This is a technique where managers selectively record or fail to record certain expenses on the income statement, using an offsetting Balance Sheet account (cookie jar) to absorb the impact on earnings.

This technique is employed on one or more expense categories. Such as bad debt expense, inventory write downs, warranty expenses, sales return, depreciation and others. For example in periods of low earnings, the amount recorded as bad debt expense may be reduced and in periods of high earnings this amount may be increased. The cookie Jar, the allowance for doubtful accounts, simply floats up and down to accommodate the desired expense accrual. The company will rarely report the Justification for changes to the allowance account.

This leaves open the allowance for a doubtful accounts cookie Jar for the executives to manage earnings.  Non Recurring Charges and the Big Bath The use of non recurring charges is an extension of the cookie Jar concept. It is common for businesses to close plants, reposition operating units, reduce labor counts, outsource non core business functions, and more. The entire amount is recorded as an expense in the current period as a no recurring charge (also known as restructuring charge).

A restructuring reserve account is established as a liability on the Balance Sheet to offset the actual cash payments for restructuring the business, which may occur over one or more subsequent accounting periods. Executives practicing earnings management underestimate these restructuring structuring charges hit the income statement in the current year. Management uses the restructuring charge to establish a restructuring reserve cookie Jar on the Balance Sheet by overstating the current period restructuring expense, thus reducing earnings in excess for the current period.

Off Balance Sheet Financing Off Balance Sheet financing is defined as debt obligations that are not recorded on the Balance Sheet. Although technically, they do not alter the earnings, they do affect they do affect the ratios that use debt in the numerator or denominator. Examples of off Balance Sheet financing include:

• Operating Leases Limited Partnerships Anoint Ventures)
• Pension Obligations
• Receivables that have been factored (sold) Project Methodology Objective To identify the various factors affecting Revenue ; Earnings Management in the Indian IT Industry.

Scope The scope of our study was the 85 listed Indian IT companies with data in the public domain for the last 5 years. Methodology The Discretionary accruals have been taken as a proxy of earnings management by a number of researchers. Discretionary accruals are calculated as the difference between total accruals and non discretionary accruals. Firms having high investments tend to report more discretionary accruals in their earnings.

The nondiscriminatory component reflects business conditions (such as growth and the length of the operating cycle) that naturally create and destroy accruals, while the discretionary component identifies management choices. The result of pulling discretionary accrual amounts from the total accrual amount is a metric that reflects accruals that are due to management’s choices alone; in other words, there appears to be no business reason for these accruals. So, discretionary accruals are a better proxy for earnings quality.

The Modified Seasons Model (1991) has been used in estimating the discretionary accruals:  Net Operating Accruals = Net Income – cash Flow from operations * NOAA/ go + ;2(Sales – / ATA)+ ;3(GAPE / ATA)+E * AND/ATA=;O+; 2(Sales – Arc / ATA)+ ;3 (GAPE / ATA)+E *TAD = ATA- AND/ATA Where, NOAA = Net Operating Accruals ATA = Average Total Assets A Sales = Change in Sales A Rice = Change in Accounts Receivables GAPE = Gross Property, Plant and Equipment AND = Non Discretionary Accruals TAD = Total Discretionary Accruals 3 different models of explaining the Earnings Management were applied and aggression models were generated.

Model 1 The value of the firm depends on its earnings. It represents the value adding services in which the firm is involved. The management emphasizes a lot on the earnings shown by the company as the stock prices react sharply to the quarterly results posted by a company. Earnings thus become a determinant of the overall value of the firm. Major institutional investors expect a steady flow of dividends. Dividends are also believed to address the issue of agency problem between corporate insiders and outsiders.

Outside investors always prefer dividends over retained earnings because hey fear that retained earnings might be used by insiders for their own benefits against the interest of outsiders. So, firms resort to earnings management to show high enough income for dividend payout. As much the reported earnings off firm are, as much the dividend expected by the shareholders and thus an overall increase in share value. However if dividend payment becomes a constraint for managers, they might manage to show reduced earnings A lot of research has been conducted to determine the nature of relationship between dividends and earnings of a firm.

One view is that dividends can be used as a predictor of earnings whereas another IEEE is that earnings can also be used as a predictor of dividends. The study outlined in the research paper tried to establish the relationship between dividend payout policy and earnings management. The major factors affecting earnings management as identified in this study is stated below: Dividend Policy: Earnings management is also practices in order to maintain the Dividend Payout ratio as it is considered a signal of the future growth perspectives of a firm in the market. Corporate Governance: Strong corporate governance practices in a country reduce the chances of earnings management. Legal provisions governing decisions of the company. Presence of outside investor protection limits the chances of earnings management as it confines the abilities and incentives of insider managers to obtain private control benefits . Shareholding pattern: In large corporations where ownership and control rests with a family and its members agency problem exists between the management (controlling family) and the minority stakeholders.

In such cases there is ample opportunity for managers to adopt earnings management in order to benefit themselves at the cost of shareholders.  Tunneling: The term kneeling refers to taking away of firm’s resources for personal benefits by controlling shareholders. This includes the activities like absolute theft from funds, loan guarantees, selling of assets or products at lower than market prices etc Controlling shareholders, willing to tunnel the firm value, have a very strong reason for earnings management as their prime objective is to hide their private control benefits from outside investors.

Earnings management is intrinsically related to tunneling in an atmosphere where chances of getting control benefits is high and chances to detect hem is low. Other factors which motivate the management to resort to earnings management may b stated as follows: Valuation for PIP. Rationed share acquisition. Escape from getting deleted . Special treatment. Inside dealing. Manipulation of Stock Prices The control variables used in this model are:  Return on Equity . Size of the Firm . Self-Finance Ratio Size of the firm is measured as a natural logarithm of the total assets of the firm following Scott and Martin (1975).

According to this model, Dividend Payout Ratio and Self Finance ratio are not significantly related to the occurrence of earnings management in a firm. They do not have affect earnings management in a significant manner. Model 2 The level of earnings management also depends upon the corporate structure. So we tried to study the effect of the ownership structure on discretionary accruals and hence, earnings management. Main dimensions of ownership structure – insiders, institutions and external block-holders. 1.

Insider ownership: There are 2 theories Theory: This theory suggests that shareholdings held by managers help align their interests with those of shareholders. Therefore by this theory discretionary accruals are negatively correlated to earnings management . Entrenchment Effect: This effect states that high levels of insider ownership can become ineffective in aligning insiders to take value-maximizing decisions. Institutional investors: Effect of Institutional Investors on earnings management can also be explained by 2 theories.

Active monitoring hypothesis. This theory states that because institutional investors are better informed than individual investors due to their large-scale development and analysis of private pre-disclosure information about firm, the information asymmetry between shareholders and managers will decline thereby making it more difficult for managers to manipulate earnings. Thus, earnings management and institutional ownership is negatively correlated. B. Passive hands-off hypothesis – Under this hypothesis, the institutional investors are inherently short-term oriented.

Corporate governance is a set of rules and regulations for the companies that how companies should be run and managed. It is a model by which board of directors ensures and transparency to the stakeholders of the company. It gives a process for solving the issues like conflict of interests of stakeholders in accordance with their in the company. Corporate governance provides a system of fair management and proper control where authority and responsibility are with separate departments and it can be called as a system of checks and balances.

A number of corporate scandals which took place in 1980s made the world think about how companies should be regulated to avoid such unethical activities. The history of corporate governance revolves around the scandals of US companies. Big Scandals which occurred due to the unethical and inadequate behavior in the companies. Thus, the formation of corporate governance first started in United States of America. Further, this system of corporate governance was introduced in United Kingdom with the Cadbury Report in 1992.

The report was the result of corporate collapses such as BCCI Bank and Robert Maxwell pension funds scandal in 1991. DEVELOPMENT OF CORPORATE GOVERNANCE IN UK A committee “Financial Aspect of Corporate Governance Committee” chaired by Adrian Cadbury was formed to give suggestions for making the financial reporting system more transparent and avoid such scandal in future. The committee made up a report called Cadbury Report which gave a number of proposals and consisted of proper code of conduct for the organization.

Proposals were also included in the rules of Stock Exchange. The suggestions were about making the role of chief executive and chairman separate, board should be much organised, non-executive directors must be properly selected, salaries and packages of directors, internal power and control should be good. More over, transparency and accountability should be present in the financial reporting system. After this report, a Rutteman Report was published in 1994 to guide the companies the way they should act

in accordance with the clause of Cadbury report which is about the effectiveness of company’s internal control. The growing concerns over the directors pay and incentives to motivate him to perform well led to the formation of Greenbury Report in 1995. Its key focus was on the directors pay and suggested that a committee consisting of non-executive directors should be formed for this and all the details about remuneration should be included in the annual report. Some of these suggestions were also included in the rules of London Stock Exchange.

However, it was not favored as much as Cadbury Report because people criticized that suggestions made does not truly link the director’s salaries with company’s performance After the publication of these reports, there was a need to find out how far the objectives of these reports have been achieved. Thus, Hampel Committee was formed which published Hampel Report. in 1998. The report objective was to revise, combine, uniform, standardize and clarify the recommendations of Cadbury and Greensbury Report. However the report views about governance was a bit different from Cadbury and Greensbury.

As it supported shareholders involvement in company’s affair to a great extent. In contrary to Cadbury, it also made the board accountable for all aspects of risk management where as Cadbury suggested that it should only be accountable for financial controls. The report mainly focused on code for good governance and to make the regulations on companies easy and simple. Following the Hampel Report, the Combine code of Corporate Governance was also published which focuses on all the aspects related to structure, functions and work of the board, institutional shareholders, directors pay .

It is called combined code as it consisted of clauses from all the three reports Cadbury, Greensbury and Hampel report. The code is a standardize form of rules for all listed companies. Every company is required to clearly states in there annual report that how an where they have applied it. This code was implemented in all the listed companies from 1998 till a revised code was introduced in 2003. The Company’s which were following Combined Code were required to add a statement explaining how they have applied the rules and provisions of combined code.

Thus, a Turnbull Committee was formed in 1998 by ICAEW whose role was to guide the companies with ways to fulfill the requirement of the Combined Code. It resulted in the publication of Turnbull Guidance in 1999 “Internal Control: Guidance for Directors on the Combined Code”. Basically, the report provided assistance to the director’s about how to follow and abide by the Combined Code. In 2003, following the review of Combined Code and then company law, Higgs Report on the role of effectiveness of the non executive directors was published.

It focuses and gives suggestions on the importance and independence of the non executive directors. The report gives the definition of non-executive director and explains its duties and responsibility . It also highlights the role of the chairman and suggests that statement should be published in the annual report explaining and giving a detailed insight of the board which should include the number of board members and meetings and it also recommends that half of the board should be consisted of non-executive directors.

It also gave the definition of ‘independence’ and explains that there should be a senior independent director who will deal with concerns of shareholders. The report also enlightens and gave suggestions related to different aspects of an organization like remuneration, recruitment, tenure, professional development, resignation, liability, relationship with shareholders and audit and remuneration committees. In the mean time, Smith report was also published and both these reports recommendations were taken in consideration which led to the alteration in Combined Code of Corporate Governance.

The Turnbull guidance was reviewed and a revised version of it was published in 2005. Since April 2005, Operating and Financial Review was necessary to provide by the companies which shall include all information regarding company’s performance and future strategy. Corporate Governance was also greatly influenced by Europeoon Union in United Kingdom. In 2001, arose concerns about corporate governance through out the world and now the global financial crises has again brought Corporate governance under consideration around the world. Big companies and leading

of the world collapsed due to the downturn in the economy. Thus, it proves that there are some flaws in the corporate governance. The UK government came forward and asked Lord Turner to review th causes of the crisis. It led the formation of Turner Review which gave suggestions to form a more effective and strong system of corporate governance in future. In 2009, FRC wanted some alteration in the Combined Code. After a discussion on the changes FRC asked for, it was concluded that the revised code will be effected from 29June 2010 and it will be known as UK Corporate Governance Code.

http://aci. kpmg. com. hk/docs/CG%20in%20UK/Higgs%20summary. pdf http://www. slideshare. net/upu21/corporate-governance-an-analysis http://www. corporategovernanceboard. se/corporate-governance/history http://www. manifest. co. uk/reports/governance/UK%20Corporate%20Governance%20Milestones. pdf CONCLUSION: The Corporate Governance Code 2010 of UK consisted of 5 Sections i. e Leadership, Accountability, Effectiveness, Remuneration and Relations with shareholders.

Moreover, it has 18 main principles, 15 supporting principles, 53 code provisions and 3 schedules. In this code 8 key changes were mad http://geniusmethods. com/wp-content/documents/Summary%20of%20UK%20Code. pdf http://www. grant-thornton. co. uk/thinking/the_boardroom/index. php/article/eight_key_changes_in_the_uk_corporate_governance_code/ us rule based approach: http://www. jstor. org/pss/25123509 comply or exp approach: http://eprints. lse. ac. uk/24673/1/dp581_Corporate_Governance_at_LSE_001. pdf