Corporate Governance - Realities and Emerging Scenario

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Corporate Governance -Realities and Emerging ScenarioPavan Kumar VijayMD, Corporate Professionals

1A very good Evening to all of youDistinguished Chief Guest Shri L K Advani, Honble Deputy Prime Minister of India, Justice Shri M N Venkatachalliah, Shri M M K Sardana, Shri G N Bajpai, Shri S Gangopadhyay, Shri N K Jain, Members of the Jury, My Fellow Council Members, Senior Government officials, Corporate Executives, Invitees, Members of Profession, Students, Ladies and Gentlemen.

Corporate Governance rests with the Vision and Perception of the Leadership

2Ladies and Gentlemen

Corporate Governance rests with the Vision and Perception of the Corporate Leadership

and

a Leader need to adopt Vision for Good Corporate Governance

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The ICSI has adopted a Vision for Corporate Governance itself

Whereas the 20th century might be viewed as the age of management, the 21st century is predicted to be more focused on governance. Corporate Governance

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Corporate governance is "the system by which companies are directed and controlled" (Cadbury Committee, 1992).What is Corporate Governance?Cadbury Committee

"Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined OECD Principles of Corporate GovernanceWhat is Corporate Governance?

Corporate Governance is the application of best management practices, compliance of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders

What is Corporate Governance?

Output Input = Wealth Created?SustainabilityHappiness andProsperity of allStakeholders

ReinvestmentDistribu- tionResearch and DevelopmentHR DevelopmentInfrastructureRisk ManagementSUPPLIERS Adequate Returns

HUMAN ASSETS Adequate Remuneration

CUSTOMERS Affordable Prices

PUBLIC Payment of Taxes and Partnership in National Development ProjectsWealth CreationWealth ManagementWealth SharingEnhancedCapabilities

Best Management Practices are Vital Here

Law and Ethics are Vital Here

Corporate Governance Framework

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Shareholders are not the only Stakeholders in Corporate Governance

2 : 1 Debt Equity Ratio2 : 1 Current Ratio

Stakeholders Stake in Corporate Governance Value Chain

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SUPPLIERSCUSTOMERSHUMAN RESOURCE

Supply Funds, Materials and ServicesValue Addition and Management of ResourcesGive Opportunity to Co. to Satisfy their NeedsAdequate Returns for Funds, Material and Services SuppliedAdequate Salary and Security for leading a Happy LifeBest Quality Products and Customer Care at Minimum Prices

ROLE OF STAKEHOLDERSEXPECTATIONS OF STAKEHOLDERS

Potential Suppliers, Human Resources and CustomersBiological, Economic and Cultural EnvironmentPUBLICPUBLIC EXPECTS PARTNERHIP FOR SUSTAINABLE DEVELOPMENT

Stakeholders in Value Chain

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Advantages of applying Best Corporate Governance Practices

12Corporate Governance is not a buzzword, there are so many advantages of applying good corporate governance practices

Growth

Growing Revenues

Growing Profits

Growing Market Value

13The first advantage is GROWTH

Growing RevenuesGrowing ProfitsGrowing Market Value

Widespread Goodwill and Brand ReputationAccess to Global MarketsBetter Access to Human CapitalReady Market for New ProductsWidening Customer Base

14Companies get Widespread Goodwill and Brand Reputation, resulting intoWidening Customer BaseReady Market for New ProductsAccess to Global Markets, andBetter Access to Human Capital

Enhanced Trust and Confidence of all StakeholdersEMPLOYEESINVESTORSCUSTOMERSSUPPLIERSGOVERNMENT AND REGULATORSSOCIETY

15andEnhanced Trust and Confidence of all Stakeholders

INVESTORSEMPLOYEESCUSTOMERSSUPPLIERSGOVERNMENT AND REGULATORS, andSOCIETY at large

Leading to

16Leading to

EnvironmentCivil SocietyBusiness SocietySUSTAINABLEDEVELOPMENT

17SUSTAINABLE DEVELOPMENT

Report on Corporate Governance Cadbury Committee 1992

First step towards Modern Corporate Governance

In India it is an age old concept

Rig Veda 1500-1200 BC

Commitment to well-being and progress of all stakeholders is our age old mantra

Indian Mythology


Commitment to well-being and progress of all stakeholders is our age old mantra

Satyam Vada Dharmam Chara- Taittariya Upanishad

22Taittariya Upanishad, which has for ages strengthened our centres of education, contains invaluable advice to students passing out from an institute of learning - Satyam Vada Dharmam Chara

Forever speak the truth and follow the dharma

23Forever speak the truth and follow the dharma

Truth : Disclosure of Actual State of Affairs (Transparency in operations and transactions)

24Truthful disclosure of State of Affairs i.e. transparency operations and transactions.

Dharma : Dharma is for the stability of society, the maintenance of social order and the general well-being and progress of humankind.

- Karna Parva of the Mahabharata. Verse-58 in Chapter 69

25In the Karna Parva of the Mahabharata Chapter 69 says:

Dharma is for the stability of society, the maintenance of social order and the general well-being and progress of humankind i.e. the Overall Governance

To provide the maximum happiness for the maximum number of people for the maximum period, based on the principles of Dharma righteousness and moral values.- Ayodhya Kand

Governance Concept in Ramayana

26In Ayodhya Kand of Ramayana, Lord Rama explains the concept of Governance as to provide the maximum happiness for the maximum number of people for the maximum period, based as it is on the principles of Dharma righteousness and moral values.

The Customer is King

27Mahatma Gnadhi said The Customer is King

This is the soul behind modernMarketing Management

28This is the soul behind modern Marketing Management

Worshipping 33 Crore Godheadssignifying various species, plants, cosmic elements,

29We have been worshipping 33 Crore Gods signifying various species, plants, cosmic elements, or 33 Crore Components of Nature.

Care for Panchtatvas - Prithvi, Jal, Vaayu, Akaash and Agni that make a human being

30We Care for Panchtatvas - Prithvi, Jal, Vaayu, Akaash and Agni that make a human being

This is our approach toEnvironment Protection

31This is our approach to Environment Protection.

The four essential principles of Mahatma Gandhi's philosophyTruth, Ahimsa, Trusteeship and Constructive Action

32The four essential principles of Mahatma Gandhi's philosophy - Truth, Ahimsa, Trusteeship and Constructive Action are widely quoted the worldover.

Gandhi said we don't own the talent but we are appointed "Trustees" by God and so we must use the talent to help others, less fortunate or talented than us.

The Board of Director being Trustees should work with highest level of integrity and independence and strive for growth of all stakeholders.

Capacity, Knowledge and ResourcesMaximisation of stakeholders value and well-being and progress of humankind TOWARDSTHROUGHTransparency, accountability and truthful disclosure of state of affairsDharmaTruth

Corporates are also expected to use their

33Similarly, Corporates are also expected to use their Capacity, Knowledge and Resources towards maximisation stakeholders value and well-being and progress of humankind (i.e. Dharma) through Transparency, accountability and truthful disclosure of state of affairs (i.e.Truth)

Companies that have followed theseprinciples ofCorporate Governancehave


Companies that have won ICSI National Award for Excellence in Corporate Governance have

Consistently earned high returns, increased their net worth and enhanced their shareholders wealth

35Consistently earned high returns, increased their net worth and enhanced their shareholders wealth

Invested significantly in proactive research and development

36Invested significantly in proactive research and development

Developed people into achievers than just performers

37Developed people into achievers than just performers

Dealt ethically with customers, government and business partners

38Dealt ethically with customers, government and business partners

Maintained and updated their professional management culture, system and processes

39Maintained and updated their professional management culture, system and processes

..and accomplished

40..and accomplished

WINNINGEMPLOYEESXCELLENCEGROWINGINVESTORSDELIGHTEDCUSTOMERSTRUSTEDSUPPLIERSSATISFIEDGOVERNMENT AND REGULATORSHAPPYSOCIETY

41Growing InvestorsWinning EmployeesDelighted CustomersTrusted SuppliersSatisfied Government And RegulatorsHappy Society

That is Excellence, which everyone aspires for and that leads to National Growth

CADBURY REPORT (1992)Focus on control and reporting functions of boards and the role of auditors.

KING I REPORT ON CORPORATE GOVERNANCE (1994)Standards of conduct for boards and directors, banks, and certain state-owned enterprisesIntegrated approach to good governance

GREENBURY REPORT (1995)Directors Remuneration - Remuneration Committee to determine remuneration of CEO and executive directors and its disclosure;HAMPEL REPORT (1998)Sound system of internal control;Board accountable for all aspects of risk management. Corporate Governance International Scenario

42..and accomplished

KING II REPORT ON CORPORATE GOVERNANCE (2002)Code of Corporate Practices and ConductDiscipline ,Transparency, Independence, Accountability, Responsibility, Fairness, Social Responsibility

OECD PRINCIPLES OF CORPORATE GOVERNANCE (1999/2004)Ensuring the Basis for an Effective Corporate Governance Framework. Rights of Shareholders and Key Ownership Functions Equitable Treatment of Shareholders Role of Stakeholders in Corporate Governance Disclosure and Transparency Responsibilities of the Board

Corporate Governance International Scenario

COMBINED CODE ON CORPORATE GOVERNANCE (2008)Standards of good practice in relation to board composition and development, remuneration, accountability and audit and relations with shareholders.

KING III REPORT ON CORPORATE GOVERNANCE (2009)Ethical leadership and corporate citizenship Governance of risk Governance of information technology Compliance with laws, rules , codes and standards Internal audit Governing stakeholder relationships Integrated reporting and disclosure.

Corporate Governance International Scenario

From end justifies the means to long term sustainable growthFrom inform others on a need to know basis to transparencyFrom family owned businesses to institution owned businessesFrom domestic to global investorsFrom closely held Boards to professionally managed Boards

GOVERNANCE LANDSCAPE INTERNATIONAL TRENDS

From less active regulatory mechanism to more active regulatory mechanismFrom Financial disclosures [14%] to Non-financial disclosures [86%] Integrated ReportingFrom unstructured to Robust Board ProcessesFrom adhoc replacements to focused Succession PlanningFrom letter to spirit and transparency

GOVERNANCE LANDSCAPE INTERNATIONAL TRENDS

Corporate Governance - Scenario in IndiaPromoters think Corporate Governance is all about complying with LawCompanies Act, 2013 & SEBI (LODR) Regulations, 2015 lay down the broad framework of CG.A CG certificate at the end of every F.Y., is good enough to certify your CG status

Corporate Governance - Scenario in India

Key components of CG consist of:

CG Theory & Practice in India

Integrated Reporting by Listed Entities Compensation AgreementsBoard Evaluation NormsSustainability Reporting Secretarial Standards

Recent Developments

Role of Independent Directors Independent Directors are the messiah of Corporate Governance in IndiaGood or bad Corporate Governance, Independent Directors are responsibleSo far, Independent Directors have performed averagely.Positive impact created by Independent Director Board processes and meetings, have become more sacrosanct. Bring experience & expertise, on tablePromoters have become more careful.

Role of Independent Directors Why Independent Directors have failed to create a much bigger impact?Afraid to take aggressive standDont have any veto power or are suppressed by brute promoter majorityAlways at the mercy of Promoters, who can appoint and remove them at any point of time. Conflict of interest

Corporate Governance issues - TATA/InfosysKey ReasonsProfessionally managed companiesFollows ethical business practicesHonest PromotersCreated value for Stakeholders But recent events raise eyebrows What can be the probable reasons:Lack of confidence between Board & PromotersDeviation from business philosophy Question mark on business decisionsTill recently, TATA & Infosys renowned example of good Corporate Governance Practices

What we learn?Bust the myth that professionally governed companies follow high standards of CG compared to promoter driven businesses. Extent to which promoters should interfere with professionally managed Board Limit up to which promoters and professionally managed Boards should interact on business related issuesPromoters or Independent Directors, who should be the real judge of evaluation of performance of Directors Whether professionally managed Board should work on the basis of broad philosophy of promoters or changing business dynamics.Independent Directors are we allowing them to play an important role?

CG vs GreedOrganizations are driven by Leaders and their philosophy Personal aspirations play an important role in the success/downfall of any organization Personal Aspirations & CG are two sides of same coin. High personal aspirations come at the cost of good CG practices. Some live examples are :

CG ParametersDifferent type of entities, different objectives, therefore different CG parameters TypeWorking patternPSUSocialisticBureaucratic controlsProfessional Driven CompaniesHigh accountability Maximizing stakeholders wealthPromoter Driven CompaniesPersonal Wealth creation

As an organization Have a dynamic stakeholder driven visionFocus on innovative practices Undertake sustainable development effortsUse Information Technology to make governance more efficient and effective Creating effective and robust Board processes through Use of Information TechnologyStructured Agenda and MIS

Recommendations to further improve CG

DirectorsEncouragement to speak freelyInstitutionalization of appointment of Independent DirectorsImplementing a rational and objective Directors Performance Evaluation system and disclosing its results with the shareholders. Clear and objective Succession planning taking Board in confidenceDisclosures Timely & effective disclosures to all stakeholderMore focus should be on non-financial disclosuresSimple and Standard annual report should be prepared


Policies Should be more result oriented Should reflect spirit rather than compliance of lawEmployeesCreate a happiness index in organizationPromote Entrepreneurship Disciplining of Professionals effective oversight of the accounting and audit profession


Clarity of Law Simplification of law will need to better governance

Thus, Although a lot has been done, but a lot needs to be done.

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CORPORATES SHOULD ACT LIKE HONEY BEE WHICH SUCK THE NECTAR OF THE FLOWER WITHOUT EFFECTING ITS FRAGRANCE AND PRODUCE HONEY FOR THE WELL BEING OF SOCIETY .

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Pavan Kumar VijayFounder & Managing DirectorD-28, South Extn. Part- I,New Delhi 110049 F: +91 1140622201T: +91 [email protected] www.corporateprofessionals.com

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Corporate Governance - Realities and Emerging Scenario

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