Corporate Governance

References for Corp. Governance

Securities & Exchange Board of India,

www.sebi.org

Harvard Business Review, ‘Readings on Corporate Governance’

Academy of Corporate Governance

www.academyofcg.org

Genesis of Governance Debate

Concept originated with separation of ownership & management

Corporatisation of business and increasing scales of production

Origin can be traced back to ‘Agency Theory’ propounded by Berle & Means

Customers

Shareholders

Board of Directors

Management

Employees

Society

Suppliers

Government

Environment

Corporate Governance Tripod

Defining Corporate Governance

……. Systems, procedures and institutions that ensure that management acts in the best interests of the owners or shareholders

On going debate about whether it should be ‘shareholders’ interest or all ‘stakeholders’ interest that the management should serve

Shareholder v/s Stakeholder Debate

Debate ongoing with strong proponents on either side

Moot point is the timeframe

In the long run, interests of all are likely to converge & need to be balanced

Sustainability of the enterprise is of paramount importance

Theoratical Underpinnings

What is a Corporation?

Agency Theory

Stewardship Theory

Stakeholder Theory

Sociological Theory

Governance Systems

Systems and structures differ in historical and local condition specific context

Entrepreneurial Form

Banking Dominated Form

Managerial Form

Institutional Form

Democratic Corporate Form

Revisiting Corporate Excellence

Profitability

GrowthTop line

Bottom line

Increasing Market Share

Satisfied Stakeholders

InSearch of Excellence

Bias for Action

Closeness to Consumers

Hands on, Value Driven

Productivity through People

Autonomy & Intrapreneurship

Stick to Knitting

Built to Last

Remarkable resilience

Profit maximization not the only / primary objective

Do not brutalize themselves with the tyranny of “OR”, instead embrace genius of “AND”.

Why good governance is an imperative ?

Immediate Factors

Corporate debacles

Vanishing companies

Corporate frauds

Rating downgrades

Pending investors’ complains

Why good governance is an imperative ?Structural Factors

Globalisation of markets

Indian companies tapping international markets for resources

Institutionalisation of securities markets

CG…. International Developments

Cadbury Committee, UK 1992Baseline consensus in UK’s financial marketsFocuses on accountability & Transparency

Greenbury Committee 1995Executive’s & director’s role and compensation

Myner Committee, UK 1995 Role of institutional investors

CG…. International Developments

California Public Employees Retirement System, USA

Global governance principles

New York Stock Exchange proposals

NASDAQ proposals

CG…. International Developments

Surbanes Oxley Act, 2002Post ENRON development

Most comprehensive piece of legislation in last 70 years

Quality Review Board ( Auditor’s Independence)

Independent Directors

Whistle Blower Policy

CG…. International Developments

German ModelBanking dominated organisational form

Conservative & risk averse boards

A unique system of 2–tier boards

No official codes, but provisions in the company legislation

Of late, demand for professionalising supervisory boards

CG…. International Developments

King Committee, South Africa 1994

Bosch Report, Australia 1995

Toronto Stock Exchange guidelines 1994

Malayasian Code 1999

OECD Principles

Recognises multiplicity of economic environments

Only recommendatory in nature

Intended to assist member governments in evaluating their legal, institutional and regulatory framework

Implementation Modalities

Available options are -Thru General LegislationThrough Stock ExchangesThrough independent and well publicised ratingsThrough institutional activism and nominee directorsThrough self regulation

Implementation Choices

Most experts are averse to generally applicable standards and legal interventionInternationally, self regulation linked to openness and accountability, seems to generate maximum supportSelf regulation may not work in India, at least in the foreseeable future – A judicious mix of all the approaches may be required

CG…. Developments in India

CII’s Desirable Code of

Corporate Governance 1998

SEBI Committee I 2000

(Chair: Kumar Mangalam Birla)

SEBI Committee II 2002

(Chair: N R Narayan Murthy)

Clause 49 of Listing AgreementBoard StructureAt least 50 % of Directors to be non-executive Minimum independent directors 33 % with non-executive chairman 50 % with executive chairman

Board Procedures A minimum of 4 board meetings in a year, with a gap

not exceeding four monthsResume of directors seeking appointment / re-

appointment

Clause 49 of Listing Agreement

Mandatory Board CommitteesAudit committee

Investor’s grievance Committee

Mandatory DisclosuresDirector’s remuneration

Related Party Transactions

Penalties & Strictures

Clause 49 of Listing Agreement

Information to Shareholders

Date, time & venue of AGM

Market price data

Listing on exchanges & security code

Number of complaints, of which pending

Un-audited quarterly results & half yearly results

Demat status

Postal ballot

SEBI Committee II & Revised Clause 49

Enhance role for Audit committeeAge ceiling for directorsMaximum of 3 terms (3yrs each) for independent directorsCode of conduct & whistle blower policy mandatoryDefinition of ‘Independent directors’ – so far not defined

CG…. Developments in India

Naresh Chandra Committee 2002

Draws heavily on Sarbanes-Oxley Act of US

Independent directors – tighter definition - exemption from criminal liabilities

Auditors – barred from taking up non-audit services – audit partner rotation – cooling off period of 2 years

Professional bodies – Umbrella quality review board - Disciplinary powers with a prosecution directorate -

Unresolved Issues

Is good governance related to better competitive / financial performance ? Should board performance be evaluated ? If so by whom ?Do independent directors need to be trained ?How should independent directors be compensated ?

Corporate Governance…. a recap

Divorce of ownership & managementShareholder v/s stakeholder debateImplementation choicesClause 49 of the listing agreement

Board structure & proceduresBoard committeesDisclosuresShareholder information

CG - Road ahead

Need to graduate from compliance in letter to compliance in spirit

Co-opt softer issues on the agenda

Apply principles of good governance and accountability across sectors

Work towards national governance