Characteristics of

Corporation &

Need for Corporate

Governance
Abhimanyu Dalal
MBA Gen - B
haracter,
Corporation

that makes
Acorporationis a legal entity, meaning
it is a separate entity from its owners
who are called stockholders. A

aracter,
corporation is treated as a person
with most of the rights and obligations
of a real person. A corporation is not
allowed to hold public office or vote, but

that makes
it does pay income taxes.
Characteristics
Legal Personality

Indefinite Life

Limited Liability

Transferability of Shares

Joint-Stock Aggregation of Risk Capital

The Concept of Legal
Personality & Rights
Salmond observes that a person is any being whom
the law regards capable of rights and duties.
Classification of persons:
Natural person
Legal person

A natural person is a being to whom the law

attributes the personality in accordance with reality
and truth.
Legal persons are beings to whom the law attributes
the personality by way of fiction, when there is none
in fact.
Separate Legal Entity
The corporation is considered a separate legal
entity, conducting business in its own name.
Therefore, corporations may
own property
enter into binding contracts
borrow money
sue or be sued
pay taxes
Indefinite Life
The sale of stock, death of a stockholder, or
inability of an employee to function does not
impact the continuous life of the corporation.
Its charter may limit the corporation's life
although the corporation may continue if the
charter is extended.
 Limited liability
The liability of stockholders is limited to the amount
each has invested in the corporation.
Personal assets of stockholders are not available to
creditors or lenders seeking payment of amounts
owed by the corporation.
Creditors are limited to corporate assets for
satisfaction of their claims.
Transferring Ownership Rights
Stockholder receives a stock certificate indicating the number of
shares of the company she/he has purchased.
Particularly in a public company, the stock can be easily
transferred at the discretion of the stockholder.
The stockholder wishing to transfer (sell) stock does not require
the approval of the other stockholders to sell the stock.
Similarly, a person or an entity wishing to purchase stock in a
corporation does not require the approval of the corporation or
its existing stockholders before purchasing the stock.
Once a public corporation sells its initial offering of stock, it is
not part of any subsequent transfers except as a record keeper
of share ownership.
 Ease of Capital
Acquisition
A corporation can obtain capital by selling stock or
bonds.
This gives a corporation a larger pool of resources
because it is not limited to the resources of a small
number of individuals.
The limited liability and ease of transferring
ownership rights makes it easier for a corporation to
acquire capital by selling stock, and the size of the
corporation allows it to issue bonds based on its
name.
Government regulations
Publicly held companies with stock traded on
exchanges are required to file their financial
statements and additional informative
disclosures with the SEBI.
Certain industries, such as banks, financial
institutions are also subject to regulations
from other governmental agencies.
 Corporation Organization
Chart
Stockholders

Chairman and
Board of
Directors

President and
Chief Executive
Officer

General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources

Treasurer Controller
Need for
Corporate
Governance

Corporate Governance : The

system by which organisations are directed and
controlled. (The Cadbury Report)
 Wide Spread of
Shareholders
Today a company has a very large number of
shareholders spread all over the nation and even
the world; and a majority of shareholders being
unorganised and having an indifferent attitude
towards corporate affairs.
The idea of shareholders democracy remains
confined only to the law and the Articles of
Association; which requires a practical
implementation through a code of conduct of
corporate governance.
Shareholders
Democracy

A new study prepared for the Association of British

Insurers (ABI) by Deminor Rating, a Belgian
governance consultancy, highlights the weakness
of European shareholder democracy.
As the chart shows, only two-thirds of the big
European firms included in theFTSEEurofirst 300
index operate a rule of one share, one vote.
In the other third of firms, power tends to be
concentrated in the hands of a minority of big
shareholders who control a majority of the voting
rights.
 Shareholders
Democracy
Practice varies widely across Europe. A mere 14% of the firms in
the sample from the Netherlands allow their owners one vote
per share; 25% of the Swedish firms; and 31% of the French
companies.
Things are far more democratic in Germany (97%) and Britain
(88%). One-fifth of the companies issue shares with multiple
voting rights, giving additional votes to selected shareholders.
One in ten firms imposes a ceiling on the number of votes that
can be exercised by any one shareholder, irrespective of how
many shares he owns.
 Corporate Scams or
Scandals
Corporate scams (or frauds) in the recent years of the
past have shaken public confidence in corporate
management.
The event of Satyam scandal, which is perhaps, one
biggest scandal, is in the heart and mind of all,
connected with corporate shareholding or otherwise
being educated and socially conscious.
The need for corporate governance is, then, imperative
for reviving investors confidence in the corporate
sector towards the economic development of society.
Greater Expectations of Society of the
Corporate Sector

Society of today holds greater expectations of the

corporate sector in terms of reasonable price, better
quality, pollution control, best utilisation of resources
etc.
To meet social expectations, there is a need for a
code of corporate governance, for the best
management of company in economic and social
terms.
Hostile Take - Overs
Hostile take-overs of corporations witnessed
in several countries, put a question mark on
the efficiency of managements of take-over
companies.
This factors also points out to the need for
corporate governance, in the form of an
efficient code of conduct for corporate
managements.
Hostile Take - Overs
Huge Increase in Top Management
Compensation
It has been observed in both developing and
developed economies that there has been a great
increase in the monetary payments (compensation)
packages of top level corporate executives.
There is no justification for exorbitant payments to
top ranking managers, out of corporate funds, which
are a property of shareholders and society.
This factor necessitates corporate governance to
contain the ill-practices of top managements of
companies.
Huge Increase in Top Management
Compensation
 Globalisation
Desire of more and more Indian companies to
get listed on international stock exchanges also
focuses on a need for corporate governance.
In fact, corporate governance has become a
buzzword in the corporate sector.
There is no doubt that international capital
market recognises only companies well-
managed according to standard codes of
corporate governance.
 Principles of Corporate
Governance
Transparency : Transparency means the quality of something which enables
one to understand the truth easily. In the context of corporate governance,
it implies an accurate, adequate and timely disclosure of relevant information
about the operating results etc. of the corporate enterprise to the stakeholders.
Accountability : Accountability is a liability to explain the results of ones
decisions taken in the interest of others. In the context of corporate
governance, accountability implies the responsibility of the Chairman, the Board
of Directors and the chief executive for the use of companys resources (over
which they have authority) in the best interest of company and its stakeholders.
Independence : Good corporate governance requires independence on the
part of the top management of the corporation i.e. the Board of Directors
must be strong non-partisan body; so that it can take all corporate decisions
based on business prudence. Without the top management of the company
being independent; good corporate governance is only a mere dream.
 References
Holderness, Clifford, andDennis Sheehan,1988a,What constrains managers
who own large blocks of stock? Managerial Economics Research Center
Working Paper 8807, University of Rochester.
P.P.S. Gogna, Mercantile Law, S.Chand & Company, New Delhi.
Kakabadse, A.andKadabadse, N.(2001),Geopolitics of Governance: Impact
of Contrasting Philosophies,PalgraveMcmillan,London.
Galbraith, John Kenneth,1955,The Great Crash, 1929(Houghton
Mifflin,Boston).
H. Kent Baker, Ronald Anderson, Corporate Governance: A Synthesis of
Theory, Research, and Practice
http://
www.economist.com/news/business/21716654-snaps-refusal-hand-out-any-votin
g-shares-part-wider-trend-towards-corporate
http://www.economist.com/node/3793305
Thank you