16. yrk reddy cg-csr-2012 - yrk reddy

© Academy of Corporate Governance1

CRF – 2012 : Control to Self Regulation

Corporate Governance & CSR

ByY.R.K. Reddy

[email protected]

February 15th 2012

© Academy of Corporate Governance 2

Objectives of the Session

A: Review of the key developments leading to revived interest in corporate governance; the current framework of assumptions; the OECD standards; the assumed benefits and business case; the broad shortcomings in Emerging Market Economies; the potential role of company registrars in promoting corporate governance.

B: Developments leading to the current logic for CSR; the international standard relating to stakeholders; leading approaches and bench marks; the dynamics; the potential for strategic CSR - key examples, whether Registrars have a role in promoting.


“ … The Directors of such companies, however, being the managers rather of other peoples` money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own …. Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company”, 1776.

PART – A

Corporate Governance – Historical Foundations


The focus on control in corporations: Berle & Means Studied the modern corporation & debated the dynamics of “ownership” and “control” in 1932 in the context of the USA.

There are severe apprehensions about control and what it can mean to Institutional investors and minority shareholders, in case of block holders participating in management and the SOEs.

Hope that risks would be abated if internal structure and processesand external institutions get developed – reducing information asymmetry and promoting attendant rationality.


Renewed Interest in 90`sThe logic for robust financial statements – Cadbury.

The AFC & Greenspan–Summers – IMF arguments.

Revolving around “Crony Capitalism” due to financial sector weaknesses (combination of inadequate capitalization & supervision of banks combined with excessive leverage & guarantee + directed lending).

Competitive capitalist / market assumptions with weak structures –“the Asian way” with cross holdings, large number of subsidiaries, lack of transparency, collusion between corporations, financial institutions and governments etc.

Weaknesses in equity market development, IFRS / FASB standards, information disclosure, oversight by independent directors, bankruptcy laws.


The International Convergence on Corporate Governance

Corporate Governance is one of the 12 key standards promoted by Financial Stability Forum (now Financial Stability Board).

IMF - World Bank, The Report on Observance of Standards and Codes (ROSC), OECD, BIS, regional and national agendas…..


GFC & the Current Debate

Financial crises are historical – followed by State intervention. (the cycle).

Several studies including the UN Commission, OECD, GFSR, ICGN, FCIC etc. Mainly argue for appropriate regulation / intense supervision;

greater transparency and disclosure norms; early action from the State; public policy / plans for impaired assets; balance sheet repairs – consistency of treatment etc. at policy level ( along with some multi-lateral moves)

At the enterprise level, the emphasis has been on advanced / robust / comprehensive risk management and qualified board oversight and activism; compensation / incentive structure that do not encourage false / fleeting profits and risks.


OECD Principles as Global Standard

I. Ensuring the Basis for an Effective Corporate Governance FrameworkThe corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

II. The Rights of Shareholders and Key Ownership FunctionsThe corporate governance framework should protect and facilitate the exercise of shareholders’ rights.

III. The Equitable Treatment of ShareholdersThe corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.


IV. The Role of Stakeholders in Corporate GovernanceThe corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

V. Disclosure and TransparencyThe corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

VI. The Responsibilities of the BoardThe corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.


The Universal Principles

Accountability Fairness Transparency Responsibility

Ensure mgmt.’s accountability to the board & board’s accountability to shareholders

Protect Shareholders rights; treat all equitably; provide redress.

Ensure timely and accurate disclosure on all material matters

Recognize the legal rights of stakeholders & promote sustainable development

These Principles should:


1Reputational agents refer to private sector agents, self-regulating bodies, the media, and civic society that reduce information asymmetry, improve the monitoring of firms, and shed light on opportunistic behaviour

External

Private

Reputational agents1

•Accounts•Lawyers•Credit Rating•Investment Bankers•Financial media•Investment advisors•Research•Corporate Governance Analysis

Markets•Competitive factor and product markets•Foreign direct investment•Corporate control

Standards(for example, accounting and auditing)Laws and regulations

Regulatory

Financial Sector•Debt•Equity

Shareholders

Board of Directors

Management

Core functions

Reports to

Appoints and

monitors

Operates

Internal

Stakeholders

Modern corporations are disciplined by internal and external factors

(Source: Corporate Governance Framework, Nadereh Chamlou, Magdi Iskande, World Bank)


Many studies have shown positive benefits. Eg: those of Mc Kinsey, ABI and IMF working paper on CGQ & CLSA studies and the subsequent ones………

Recap: Other compilations had shown following benefits in earlier years:

Improves Valuation of Assets- Share premium 22% to 30% as per Mc Kinsey survey; 700 – fold increase in firm value in Russia (21 firms)

Improves Access to Capital- CG a major factor for competitive provision of finance; access to IFI’s.

Lowers the Cost of Capital- CG helps in finer rates. Eg: Romania’s BCR

Improves Efficiency- ABN Amro study in Brazil shows 20% higher P / E ratios; 45% higher ROEs and 76% higher net margins. Deutsche Bank study of S & P 500 shows out performance by 19% over two years; Harvard / Wharton study shows abnormal returns of 8.5%; CLSA study of 100 companies shows 8% points higher EVA;

Other benefits - reduced risks – improves the reputation and trust ; increases competitiveness.

Possible benefits to companies


The old idea of CG Premium that continues to make business sense….


One perspective as to where Asia stands in CG ……


Source: F & C Investments

An FII’s compilation on other relevant institutions…..


Regulatory Approaches

Two Most Popular Typologies:

Principle based – Comply / Apply or Explain ( and justify). Rule based, regulated / legislated and well enforced.Newer / emerging hybrid versions:

“Comply or Explain” but in legal and regulatory guidance. Mostly principle-based but one or two strongly rule based,

regulated but fully enforced. Rule based, regulated / legislated but weakly enforced by

intention.


Role of Company Registrars

Regulation – entry, as going concerns, exit facilitations. The tradeoff between hard nosed regulation / enforcement

vs. market discipline.

Is there a role for campaigns / reputation intermediation? Any other experiences?


Corporate Social responsibility, corporate citizenship, responsible business, stakeholder engagement etc. are cluster concept: Often fuzzy and overlapping; policy as well as action oriented.

The political economy of CSR can be traced to: Beginnings mainly in the 50’s. Much controversy during the 70’s (strength of collectives; Milton

Freidman’s perspective). Strong shift to customers as key stakeholders during the 80’s (issue of

competition & competitive strategy for survival); Tilt to providers of finance and policy regimes in the 90’s (importance

of finance; liberalization) The upsurge of sustainability issues in current times ……

PART – BCSR – A Part of Cluster Concepts


CSR and Other Responsibilities –The Challenge of Exclusive to Inclusive Perspective

http://joycetan.posterous.com/carrolls-csr-pyramid�


– The Role of Stakeholders in Corporate Governance

“The Corporate Governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financial sound enterprises”.

OECD Principles of Corporate Governance – What does the Global Standard Say?


The rights of stakeholders that are established by law or through mutual agreements are to be respected.

Where stakeholders interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.

Performance-enhancing mechanisms for employee participation should be permitted to develop.

Where stakeholders participate in the corporate governance process, they should have access to rely an, sufficient and reliable information on a timely and regular basis.

Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this.

The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.


Popular definition:

“A stakeholder is any group or individual who can affect, or is affected by, the achievement of an

organization's objective”Freeman, 1984

The Idea of a Stakeholder:


“ A stakeholder is any institution, group or individual who can get benefited or affected by,

and/or can benefit or adversely affect, a corporation`s actions in pursuit of its primary

objectives”

Y.R.K. Reddy, Presentation at OECD meet, Cebu, 2007.

In the context of Corporate Governance


Several guidelines, case studies, international standards forassessment / reporting – especially as part of CSR(Stakeholder engagement may be larger than CSR).

Noteworthy: IFCs Stakeholder Engagement – good practicemanual; IFCs EHS guidelines; OECD`s guidelines forMNEs; Dow Jones Sustainability Index, FTSE4Good Index,SA 8000 / 14000, AA1000, GRI et al + principles such asCaux.

ISO 26000 adopted in September 2010

A World by itself!

Available Leads for CSR / Stakeholder Engagement


Distribution

Channels

Direct Customers

Direct EmployeesSubsidiaries

Public Deposit Holders

Parliament (COPLI++)

Ministry of HI&PE

Joint

VenturesMinistry of Steel & Mines

Ministry of Finance

State Govts. (Legislature,Laws, Compliances

Auditors

Other Central GovtBodies/Laws

Banks &Financial

Institutions Certifying/rating bodies

Consultants/ Specialist Advisory-National& International

Ad Agencies-Brand Ambassadors,Celebrity Employees

Retirees& Families

Indirect Employees (Contract and Other Labour)

Families of Employees – Townships – Hospitals-Community CentresSchools, Colleges,

Technical Institutes

Indirect Customers

Shareholders-Government, Institutions,

General Public

Unions

CVC

CAG

IndustryAssociations

Model Villages

Neighborhood-environment/Infrastructure

Miscellaneous

Direct SuppliersDomestic/International

NGOs

Employee Cooperatives

Distribution Logistics

Ex: Stakeholder Map. A steel SOE

Implications for CSR??


Monitor with minimum effort.

Keep

Informed

Involve “Partner”High

POWER

Low

Low INTEREST High

Dynamics of stickiness, capture, direction and the need for close analysis


Towards Strategic CSR / CSV – the Many Success Stories

•Powerful ideas (ex. Michael Porter et al, 2002, 2006, 2011).

Even more powerful examples. ( Nestle, Jain irrigation, ITC, DRL……).

The power of coalition with INGOs. ( Ex: Aide et Actions’ innovative engagement with corporates; the initiatives of several SOEs in India. ).

Key steps: close analysis, explicit policy, detailed planning, partnerships, execution, reporting.


Adapted from Porter & Kramer – Strategy and Society, HBR December 2006

Firm Infrastructure(e.g. financing, planning, investor relations)

Human Resource Management(e.g. recruiting, training, compensation system)

Technology Department(e.g. product design, testing, process design, material research, market research)

Procurement(e.g. components, machinery, advertising & services)

Inbound Logistics

(e.g. incoming material

storage, data collection,

service customer access)

Operations

(e.g. assembly,

component fabrication,

branch operations)

Outbound Logistics

(e.g. order processing,

warehousing, report

presentation)

Marketing & Sales

(e.g. sales force,

promotion, advertising proposal

writing, web site)

After Sales Service

(e.g. installation customer support

complaint resolution

report)


“The guidelines for Corporate Social Responsibilities for Central Public Sector Enterprises”. Key concerns in reviving old debates on objectives, level playing field and control shift.

The proposed Companies Law Bill and the approach to mandating CSR – the policy implications of governance, tax levies and their adverse impact on market forces / discipline.

“The National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business”.

What role can Registrars of Companies play?

Some Current Policy Steps in India – Do they need International Best Practices?


The lack of unitary standards and multiplicity of reputation agents.

Lack of standards in accounting, reporting and disclosure. The difficulty in recognizing the risks associated with CSR

and their second-order trades-off with strategy. Others – drawing from international experiences?

Some Challenges

16. yrk reddy cg-csr-2012 - yrk reddy

Business

regulated

obtain effective

corporate

corporate

world bank

porter amp

encourage

mutual agreements