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Corporate Governance, Reputation and Competitive Credibility : 

Corporate Governance, Reputation and Competitive Credibility Dr. B. Yerram Raju Regional Director PRMIA Chapter Hyderabad, INDIA

Introduction : 

19-Oct-09 yerramraju@prmia.org 2 Introduction Definitions Corporation Corporate Governance Reputation/credibility relationship Stakeholder/shareholder Dilemma, Risk and Reputation Ethics in the Boardroom

Definition : 

19-Oct-09 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.org 11 GOVERNANCE LAW BOARD OF DIRECTORS EXECUTIVE MANAGERS REGULATORS SHARE HOLDERS PUBLIC OPINION PLAYERS IN GOVERNANCE

Board Styles : 

19-Oct-09 yerramraju@prmia.org 12 Board Styles Country Club : Interpersonal Relations Representative: Emphasis on Tasks Professional: Tasks & Interpersonal Relations

Slide 13: 

19-Oct-09 yerramraju@prmia.org 13 Approve and work with and through the CEO Providing Accountability Strategy Formulation Monitoring and supervising Policy Making Outward Looking Inward Looking Past and Present Focused Future Focused Framework for analysing Board activities

Slide 14: 

19-Oct-09 yerramraju@prmia.org 14 CONFORMANCE PERFORMANCE Providing accountability Strategy Formulation Monitoring and supervising Policy making Outward looking Inward looking Past and present focused Future Focused

Slide 15: 

19-Oct-09 yerramraju@prmia.org 15 Low High Low High Concern for board tasks Concern for board relationship Country-club Board Representative Board Rubber stamp Board Professional Board Different Board Styles

Slide 16: 

19-Oct-09 yerramraju@prmia.org 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 B. Goals 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 yerramraju@prmia.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; Remunerate directors; Nominate directors; 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 (State) 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 yerramraju@prmia.org 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 yerramraju@prmia.org 19 Disclosures and Transparency Disclosure should include, but not be limited to , material information on: The financial and operating results of the company Company objectives 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 yerramraju@prmia.org 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 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.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 yerramraju@prmia.org 24 Contribution Of Directors: In Corporate Decision Making Need To Become Active Participants With Clearly Defined Responsibilities And Not Passive Advisers Compensation Attendance Of Directors Management Information System Audit Committee Share Holder’s Information Consolidation Of Accounts Compliance Certificate Disclosure Norms Funding Against Shares Debt Default Debt Issues Default On Fixed Deposits Nominee Directors

Slide 25: 

19-Oct-09 yerramraju@prmia.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 yerramraju@prmia.org 26 ROLES OF DIRECTORS Performance Wiseman; Specialist Window-on-the World Figurehead Contact Person Status Provider Conformance Judge Catalyst Supervisor Watchdog Confidante Safety Valve

CLAUSE 49 REQUIREMENTS : 

19-Oct-09 yerramraju@prmia.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 yerramraju@prmia.org 28 CLAUSE 49 REQUIREMENTS Management Discussion & Analysis Report – To include: Outlook 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 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.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 yerramraju@prmia.org 32 RECENT DEVELOPMENTS SEBI CONSTITUTED A COMMITTEE HEADED BY SHRI N. R. NARAYANA MURTHY TO REVIEW EXISTING CODE OF CORPORATE GOVERNANCE RECOMMENDATIONS: 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 yerramraju@prmia.org 33 Reputation Model License to operate Global / National / Regional Financial Reputation Lenders, Shareholders, Financial Institutions/Analysts Business Reputation Product Service 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 yerramraju@prmia.org 34 Product/Service Reputation Business Reputation Financial Reputation Social Reputation CORPORATE CREDIBILITY

Governance –reputation-competition interaction : 

19-Oct-09 yerramraju@prmia.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 yerramraju@prmia.org 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 yerramraju@prmia.org 37 Strategy and Risk Management - impact of reputation. Lessons from Enron/Arthur Andersen Unethical behaviour gets out Mock trading room Whistle blowing 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 yerramraju@prmia.org 38 The Maintenance of an Ethical Framework for Boardroom Decision-making Values Perspective Reputation, independence and director selection. ‘Conflicts-of-interest amnesia’ 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 yerramraju@prmia.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