Corporate Governance, Reputation and Competitive Credibility : Corporate Governance, Reputation and Competitive Credibility Dr. B. Yerram Raju
Hyderabad, INDIA Introduction : 19-Oct-09 email@example.com 2 Introduction Definitions
Stakeholder/shareholder Dilemma, Risk and Reputation
Ethics in the Boardroom Definition : 19-Oct-09 firstname.lastname@example.org 3 Definition “Corporate Governance is concerned with the structure and processes of the Board and its relationship with shareholders, regulators, auditors, top management, creditors, the State and employees in general” Another Definition : 19-Oct-09 email@example.com 4 Another Definition “Governance is the culture, policies, processes, Laws and institutions that define the structure by which companies are directed and managed.”
Source: Sun Guard Survey on Governance, Risk and Compliance 2008 CORPORATE GOVERNANCE : 19-Oct-09 firstname.lastname@example.org 5 CORPORATE GOVERNANCE WHAT IS CORPORATE GOVERNANCE – PROCESSES AND STRUCTURE BY WHICH BUSINESS AND AFFAIRS OF CORPORATE SECTOR IS DIRECTED AND MANAGED
OBJECTIVE OF CORPORATE GOVERNANCE
a) TO BUILD UP AN ENVIRONMENT OF TRUST AND CONFIDENCE AMONGST THOSE HAVING COMPETING AND CONFLICTING INTEREST
b) TO ENHANCE SHAREHOLDERS’ VALUE AND PROTECT THE INTEREST OF OTHER STAKEHOLDERS BY ENHANCING THE CORPORATE PERFORMANCE AND ACCOUNTABILITY Slide 6: 19-Oct-09 email@example.com 6 Defining The Corporation “An artificial person of legal entity created by, or under the authority of, the laws of a state…. Is distinct from the individuals who comprise it.”
- Black’s Law Dictionary, 6th Edition, 1990
“An ingenious device for obtaining individual profit without individual responsibility.”
Ambrose Bierce, The Devil’s Dictionary Slide 7: 19-Oct-09 firstname.lastname@example.org 7 Defining Corporate Governance “..is the system by which companies are directed and controlled…”
Cadbury Report (UK), 1992
“..to do with power and accountability: who exercises power, on behalf of whom, how the exercise of power is controlled.”
Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993 Slide 8: 19-Oct-09 email@example.com 8 Defining Corporate Governance Shareholder Value Maximisation is the Key attribute of several definitions of corporate governance, especially in countries of anglo-saxon origin or influence
Stakeholder Importance and Influence is highlighted in many Continental countries and in Japan Slide 9: 19-Oct-09 firstname.lastname@example.org 9 Defining Corporate Governance Increasingly, stakeholder rights are beginning to be recognised even in countries emphasising shareholder value maximisation
Indian response, while focussing on shareholder value maximisation, does recognise stakeholder claims
(CII & SEBI draft Codes on corporate governance) What makes a ‘Respected Company’ in India (Business world 27-1-03) : 19-Oct-09 email@example.com 10 What makes a ‘Respected Company’ in India (Business world 27-1-03) Core values of the leader, shared by staff
Quality of products and services
Ethics - trust, transparency, honesty & integrity, care & responsibility
‘Track record’ – period of on-going improvement
Ability to track, manage and retain talent
Responsive to change, dynamic, globally competitive
Performance = growth, sales, profitability - value return to shareholders & stakeholders Slide 11: 19-Oct-09 firstname.lastname@example.org 11 GOVERNANCE LAW BOARD OF DIRECTORS EXECUTIVE MANAGERS REGULATORS SHARE HOLDERS PUBLIC OPINION PLAYERS IN GOVERNANCE Board Styles : 19-Oct-09 email@example.com 12 Board Styles Country Club :
Emphasis on Tasks
Tasks & Interpersonal Relations Slide 13: 19-Oct-09 firstname.lastname@example.org 13 Approve and work with and
through the CEO Providing
Formulation Monitoring and
supervising Policy Making Outward
Looking Past and Present Focused Future Focused Framework for analysing Board activities Slide 14: 19-Oct-09 email@example.com 14 CONFORMANCE PERFORMANCE Providing
Formulation Monitoring and
looking Past and present focused Future Focused Slide 15: 19-Oct-09 firstname.lastname@example.org 15 Low High Low High Concern for board tasks Concern for board relationship Country-club
Board Rubber stamp
Board Different Board Styles Slide 16: 19-Oct-09 email@example.com 16 MANPOWER PLANNING PERFORMANCE APPRAISAL LONG-RANGE GOALS STRATEGIC PLANNING CAPITAL ALLOCATION Ensure That The Status Of Organizational Strength And Manpower Planning Is Equal To The Requirements Of The Long-range Goals. Ensure That The Management Succession Is Being Properly Provided Elect Top Management Review Results Compared With:
A. Corporate Philosophy
C. Competition Appraise Top Management Approve Annually Performance Of The Board And Take Steps To Improve Its Performance Approve A Corporate Philosophy Annually Review And Approve The Corporation’s Strategy Review And Approve The Corporation's Capital Allocations Review And Approve The Corporation’s Long-range Goals Review And Approve The Corporation’s Financial Standards, Policies, And Plans THE BOARD’S RELATIONSHIP TO THE MANAGEMENT PROCESS Slide 17: 19-Oct-09 firstname.lastname@example.org 17 General Meeting of Shareholders Meets annually to approve accounts & elect directors who may also be employees, advisors, consultants, etc. Board of Directors
Appoints own chairman and CEO (who may be the same person) and has power to form sub-committees to: Manage audit matters;
Perform any other activities including management of any ESOP CEO
controls all operations and all aspects of management & employees Auditor Stock Exchange Bank(s) Media Professional bodies (accounting standards, etc.) Market forces
For: Employees, raw materials finance technology & customers Unions Union
members INTERNAL GOVERNANCE INVESTORS Federal Government
Trade practices, monopolies, price justification, share issues, trading, tax, industrial relations, etc. Regional Government
Health, safety, environmental, tax, consumer, protection, etc. Local Government
Building, tax, environment, health, waste disposal, pollution, etc. PUBLIC SECTOR EXTERNAL GOVERNANCE PRIVATE SECTOR EXTERNAL GOVERNANCE Slide 18: 19-Oct-09 email@example.com 18 The Role of stakeholders in Corporate Governance The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected.
Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redressal for violation of their rights.
The corporate governance framework should permit performance-enhancing mechanisms for stakeholder participation.
Where stakeholders participate in the corporate governance process, they should have access to relevant information. Slide 19: 19-Oct-09 firstname.lastname@example.org 19 Disclosures and Transparency Disclosure should include, but not be limited to , material information on:
The financial and operating results of the company
Major share ownership and voting rights
Members of the board and key executives, and their remuneration.
Material foreseeable risk factors.
Material issues regarding employees and other stakeholders.
Governance structures and policies Slide 20: 19-Oct-09 email@example.com 20 Disclosures and Transparency Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit.
An annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented.
Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users. Slide 21: 19-Oct-09 firstname.lastname@example.org 21 Responsibilities of the Board The board should fulfil certain key functions, including:
Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objective; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.
Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process. Slide 22: 19-Oct-09 email@example.com 22 Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.
Ensuring the integrity of the corporation's accounting and financial reporting systems including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control and compliance with the law.
Monitoring the effectiveness of the governance practices under which it operates and making changes as needed
Overseeing the process of disclosure and communications Responsibilities of the Board Contd.. Slide 23: 19-Oct-09 firstname.lastname@example.org 23 Responsibilities of the Board Contd.. The board should be able to exercise objective judgement on corporate affairs independent in particular, from management.
Board members should devote sufficient time to their responsibilities
In order to fulfil their responsibilities, board members should have access to accurate, relevant and timely information. Slide 24: 19-Oct-09 email@example.com 24 Contribution Of Directors: In Corporate Decision Making Need To Become Active Participants With Clearly Defined Responsibilities And Not Passive Advisers
Attendance Of Directors
Management Information System
Share Holder’s Information
Consolidation Of Accounts
Funding Against Shares
Default On Fixed Deposits
Nominee Directors Slide 25: 19-Oct-09 firstname.lastname@example.org 25 Responsibilities Of Executive And Non-executive Directors
Responsibilities Of Auditors
Debate On The Separation Of CEO And Chairman
Appointment Of Nomination Committee: Bring To The Board Necessary Caliber And Freshness Of Thought Without Compromising Continuation And Experience ROLES OF DIRECTORS : 19-Oct-09 email@example.com 26 ROLES OF DIRECTORS Performance
Status Provider Conformance
Safety Valve CLAUSE 49 REQUIREMENTS : 19-Oct-09 firstname.lastname@example.org 27 CLAUSE 49 REQUIREMENTS Remuneration Of Directors – Remuneration of Non-executive Directors to be Decided by the Board. Details of Remuneration Package, Stock Options, Performance Incentives of Directors to be Disclosed
Board Procedures – Atleast 4 Meetings in a Year. Director not To be Member of More Than 10 Committees and Chairman of more than 5 Committees across all Companies
Management Discussion & Analysis Report – Should Include:
Industry Structure & Developments
Opportunities & Threats
Segment Wise Or Product Wise Performance CLAUSE 49 REQUIREMENTS : 19-Oct-09 email@example.com 28 CLAUSE 49 REQUIREMENTS Management Discussion & Analysis Report – To include:
Risks & Concerns
Internal Control Systems & Its Adequacy
Discussion on Financial Performance
Disclosure by Directors on Material Financial and Commercial Transactions with the Company
Shareholders Information - Brief Resume of New/re-appointed Directors, Quarterly Results to be Submitted to Stock Exchanges and to be Placed on Web-site, Presentation to Analysts CLAUSE 49 REQUIREMENTS : 19-Oct-09 firstname.lastname@example.org 29 CLAUSE 49 REQUIREMENTS Shareholders’/investors Grievance Committee Under the Chairmanship of Independent Director. Minimum 2 Meetings in a Year
Report on Corporate Governance and Certificate from Auditors on Compliance of Provisions of Corporate Governance as per Clause 49 in the Listing Agreement RECENT DEVELOPMENTS : 19-Oct-09 email@example.com 30 RECENT DEVELOPMENTS Committee Headed by Shri Naresh Chandra Constituted in August 2002 to Examine Corporate Audit, Role of Auditors, Relationship of Company & Auditor
Recommendation of Naresh Chandra Committee:
Recommended a List of Disqualifications for Audit Assignments like Direct Relationship with Company, any Business Relationship with Client, Personal Relationship with Director
Audit Firms not to Provide Services such as Accounting, Internal Audit Assignments Etc. to Audit Clients
Auditor to Disclose Contingent Liabilities & highlight Significant Accounting Policies RECENT DEVELOPMENTS : 19-Oct-09 firstname.lastname@example.org 31 RECENT DEVELOPMENTS RECOMMENDATION OF NARESH CHANDRA COMMITTEE:
AUDIT COMMITTEE TO BE FIRST POINT OF REFERENCE FOR APPOINTMENT OF AUDITORS\
CEO & CFO OF LISTED COMPANY TO CERTIFY ON FAIRNESS, CORRECTNESS OF ANNUAL AUDITED ACCOUNTS
REDEFINITION OF INDEPENDENT DIRECTORS – DOES NOT HAVE ANY MATERIAL, PECUNIARY RELATIONSHIP OR TRANSACTION WITH THE COMPANY
COMPOSITION OF BOARD OF DIRECTORS
STATUTORY LIMIT ON THE SITTING FEE TO NON-EXECUTIVE DIRECTORS TO BE REVIEWED
RECOMMENDATIONS HAVE FORMED PART OF COMPANIES Act, 2003 RECENT DEVELOPMENTS : 19-Oct-09 email@example.com 32 RECENT DEVELOPMENTS SEBI CONSTITUTED A COMMITTEE HEADED BY SHRI N. R. NARAYANA MURTHY TO REVIEW EXISTING CODE OF CORPORATE GOVERNANCE
STRENGHTENING THE RESPONSIBILITIES OF AUDIT COMMITTEE
IMPROVING QUALITY OF FINANCIAL DISCLOSURES
UTILISATION OF PROCEEDS FROM IPO
TO ASSESS & DISCLOSE BUSINESS RISKS
FORMAL CODE OF CONDUCT FOR BOARD
WHISTLE BLOWER POLICY TO BE PALCE IN A COMPANY PROVIDING FREEDOM TO APPROACH THE AUDIT COMMITTEE
SUBSIDIARIES TO BE REVIEWED BY AUDIT COMMITTEE OF HOLDING COMPANY Reputation Model : 19-Oct-09 firstname.lastname@example.org 33 Reputation Model License to operate Global / National /
Reputation Lenders, Shareholders,
Financial Institutions/Analysts Business
Reputation Customers, suppliers, employees,
Managers, competitors, industry groups, government regulators Quality, customer service, product functionality
Aesthetic appeal/design, ‘value for money’ Social Reputation Slide 34: 19-Oct-09 email@example.com 34 Product/Service Reputation Business Reputation Financial Reputation Social
CREDIBILITY Governance –reputation-competition interaction : 19-Oct-09 firstname.lastname@example.org 35 Governance –reputation-competition interaction Tone at the top - Steward or Agent – Need both.
This of course is not entirely new to India. Decades ago, Mahatma Gandhi referred to the
“trusteeship obligations inherent in company operations, where assets and resources are pooled and entrusted to the mangers for optimal utilisation in the stakeholders’ interests.” The Management-stakeholder -Shareholder Dilemma : 19-Oct-09 email@example.com 36 The Management-stakeholder -Shareholder Dilemma Narrow v wide focus
Impact of corporate collapses – wide focus becoming core concern
Board reputation and independence –
Sarbanes-Oxley Act in US
Naresh Chandra Report in India
Higgs Report in UK Strategy and Risk Management - impact of reputation. : 19-Oct-09 firstname.lastname@example.org 37 Strategy and Risk Management - impact of reputation. Lessons from Enron/Arthur Andersen
Unethical behaviour gets out
Mock trading room
Reputation cannot be forsaken – major accounting MNC disappears in 3 months.
Relationships between advisors, agents and principals being investigated and questioned – valuers, analysts, bankers, remuneration consultants, directors and executives. The Maintenance of an Ethical Framework for Boardroom Decision-making : 19-Oct-09 email@example.com 38 The Maintenance of an Ethical Framework for Boardroom Decision-making Values Perspective
Reputation, independence and director selection.
Long term proximity
Compliant board culture
Lack of ‘new blood’ - recruiting ‘people like us’
Dealing with the future - avoid problems by limiting their likelihood. Slide 39: 19-Oct-09 firstname.lastname@example.org 39 The Key Message Prevention is better than Cure
Pre-emption is better than Redemption
Proactive Planning is better than Reactive Redress Thank Youyerramr@gmail.comwww.prmia.org : Thank Youyerramr@gmail.comwww.prmia.org