corporate govern

Corporate Governance : 

Corporate Governance

What is Corporate Governance ? : 

What is Corporate Governance ? Corporate governance is a broad term that has to do with the manner in which the rights and responsibilities are shared among owners, managers and shareholders of a given company. Within any corporation, the structure of corporate governance begins with laws that impact the operation of any company within the area of jurisdiction. Companies cannot legally operate without a corporate structure that meets the minimum requirements set by the appropriate government jurisdiction. All founding documents of the company must comply with these laws in order to be granted the privilege of incorporation. 2

Effect of Corporate Governance : 

3 Effect of Corporate Governance Source: A McKinsey Survey of Global Investors

What went wrong in the recent past? : 

4 What went wrong in the recent past? Environment Loss of moral fibre of corporations Business environment characterized by need to compete with the new economy Boards Fundamental weaknesses in business models sought to be compensated by adoption of aggressive accounting practices Ignored ethics and value systems when a much hyped business strategy failed to deliver as expected and articulated to Wall Street Incompetence of board members and overriding of audit committees Managements Stock option heavy compensation structures Bonus linked to short-term revenue growth, EPS and stock price An inability to accept failure Excessive focus on beating the street

What went wrong in the recent past ? : 

5 What went wrong in the recent past ? Auditors Aggressive interpretation of accounting standards Independence compromised to obtain lucrative consulting assignments Employees Compensation linked to stock-price movement Large disparity between the highest and lowest paid employee Culture of greed promoted within the organization by management Manipulative accounting practices Analysts Ever-greening of reports with an eye on investment banking assignments Pressurized managements to beat quarterly estimates Investors Short term focus of investors

Global Reactions : 

6 Global Reactions Regulatory reactions SOX NYSE/NASDAQ Rules Clause 49 of listing agreement in India Corporate reactions Focus on fundamentals of business models Focus on strengthening internal controls and information systems Stock options Enhanced disclosures in MD&A and Annual Reports Guidance Focus on critical accounting policies Aggressive journalism Accounting/Governance was the main story for months Glorification of the whistleblower Time Magazine’s Person of the Year

Key Themes of Current Reforms : 

7 Key Themes of Current Reforms Independent directors and audit committees have enlarged responsibilities Stricter independence standards for audit committees Enhanced role of the whistle blower Board effectiveness and integrity targeted by regulators, politicians and the media Compensation structures are under attack New level of discipline brought to SEC reporting and under Clause 49 CEO/CFO certifications Improvement in processes as effectiveness of internal controls need to be certified Improved processes and controls have connected the board to the day to day functioning of the company Real time disclosure and shortened deadlines Auditor independence Repeal of self regulation for the auditing profession Analyzing the analysts

What is the Current Status on Corporate Governance Practices? : 

8 What is the Current Status on Corporate Governance Practices? Insistence on forms and structures Overarching regulations and regulatory overkill Inadequate number of strong independent directors Large liabilities for corporations and officers Has the pendulum swung too far? For the first time in the decade-long history of the Index of Economic Freedom, the United States is no longer among the Top 10 “Most Free Countries” Wall Street Journal and the Heritage Foundation “Index of Economic Freedom” India is not even in the list of Top 10

What is the Current Status on Corporate Governance Practices? : 

9 Greater emphasis on leadership by example Boards are returning to basic value systems Each culture should look back to its roots for value systems India’s centuries old principles of “Dharma” Strengthening the moral fiber of the corporation Value systems are helping build corporate governance framework for companies Boards are redefining value creation Not merely increase in stock prices What is the Current Status on Corporate Governance Practices?