Corporate Governance Scorecard

7/25/2019 Corporate Governance Scorecard

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Group F | Anurag | Simmi | Ankit | Sejal

Corporate

Governance

Scorecard


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Contents

Executive Summary ................................................................................................................................. 2

Objective ................................................................................................................................................. 3

Goals of CG Scorecard ............................................................................................................................. 3

Users of Corporate Governance Scorecard ............................................................................................ 4

Red Flags/ Caveats in the Implementation of Scorecard ........................................................................ 5

Global Reporting Initiative ...................................................................................................................... 5

Step by Step Process to Design and Implement CG Scorecard ............................................................... 6

Key Concerns Addressed by the Scorecard ............................................................................................. 7

Limitations of Corporate Governance Scorecard.................................................................................... 9

SBI- Corporate Governance in Banking Sector...................................................................................... 10

Recommendations for Companies trying to Implement CG Scorecard ................................................ 12


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Executive Summary

A scorecard is a quantitative tool to measure the practices of the company in accordance with a

code or standard of corporate governance. Scorecards compare these governance practices to a

benchmark. Typically the benchmark is set against a national code of corporate governance or an

international code or standard. Scorecards are used not only to measure regulatory compliance but

also the observance of a voluntary code of best practice. They assess a companys governance

practices, how far it has progressed over time, and also in comparison to different companies and

even groups of companies within or across countries.

One of the major benefits of scorecards is that they create and increase awareness about good

governance standards and practices at different levels of the market or industry. They are part of a

long-term, iterative process designed to improve the culture of governance within a country. The

other benefits are given below:

1.

Scorecards give information about the quality of governance practices. They can tell

whether companies ignore the codes or follow the codes of recommendations. They provide

information that can be used to compare practices between different companies and

between different countries.

2. Scorecards influence companies to improve their governance practices. Comparisons with

other companies provide important information on how the company ranks against a peer

company and hence, can motivate companies to improve their governance.

3. Companies and stakeholders are the main beneficiaries of scorecard. This is because

scorecards help companies to improve their decision making, risk management, strategy,

control, and organization work ethos.


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Objective

The aim here is to understand the role of governance norms in strategic operations of the company

and how compliance with these norms can be measured and quantified.

Identify the broad goals of scorecard at market level and company level and how they canbe achieved

Find the key stakeholders and users of scorecard

Possible roadblocks/caveats

Design a step by step process to conduct a scorecard project

The key questions that will be addressed by the scorecard

The limitations of the scorecard

Recommendations on how the scorecard implementation can be made more effective

To identify how SBI follows and applies the corporate governance scorecard and what are

the parameters that it considers in the scorecard

Goals of CG Scorecard

CG scorecard serves as a device to encourage and motivate companies to adhere to good corporate

governance practices. While the regulators use it to evaluate market response to a corporate

governance code, the companies might use it to guide their adherence to the recommended

practices contained in a corporate governance code. The overall business ecosystem can benefit

from CS scorecard as well, as not only it promotes a better business climate but the transparent

disclosure by companies will help financial markets flourish by boosting investors & analysts

confidence. By using CG scorecards, companies can enhance their performance at the market and

company levels.

CG scorecard goals at the market level:

At the market level, the major goal is the development of safer and more efficient capital markets.

One way to strengthen capital markets is to improve the implementation of the governance

framework. Governance codes and standards are an important part of this framework. Scorecards

encourage implementation of standards of practices by benchmarking companies and countries over

time. Scorecards set expectation levels, generate incentives for reform, help direct change, and can

set in motion a process of continual improvement.

CG scorecard goals at the company level:

At the company level these goals begin with providing companies with a powerful analytical tool.

Scorecards are a useful basis for companies to start an analysis of their governance practices. It helps

identify shortcomings against locally defined standards or generally accepted international standards

of good practice. It will also ensure that companies take CSR activities seriously. Merely donating

money to the charity at the end of the financial year is not enough. The organizations should

incorporate efficiency into their business model and also continue to give back to the society in the

form of initiatives better education, clean water, carbon and water footprint reduction among

others. The findings of a scorecard can, in turn, be used to help the company develop a corporate


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governance improvement plan. The ultimate outcome should be better operational performance

and lower risk as a result of better governance practices.

Users of Corporate Governance Scorecard

Potential users of scorecards include companies, regulators, stock exchanges, institutes of directors,

and finance institutions (FIs). Each is likely to have somewhat different goals. Companies tend to be

more interested in addressing the concrete day-to-day issues they face in their governance.

Regulators and stock exchanges tend to be more interested in measuring code compliance and

drawing conclusions about the effectiveness of the regulatory framework. DFIs are usually interested

in encouraging market-level change in corporate governance practices and transferring knowledge

and skills to local counterparts.

Each user will likely play a different role in the development of a scorecard. It is useful to distinguish

between the roles of different users to see how and what each contributes.

Users What can a scorecard help achieveCompanies Conduct self-assessment

Improve governance practices

Improve board functions

Improve company reputation among shareholders

Create importance of CSR initiatives through improving the

efficiency of the business operations and not just mere

philanthropy

Membership organizations

(chambers of commerce,

institutes of directors, etc.)

Encourage better governance practices among companies

Raise public awareness of governance issues

Educate companies & public on the impact of governance

practices

Regulators & Government

Institutes

Create incentives for better governance

Gather information to guide the development of law and

codes

Provide a basis for companies to report on their

governance

Clearly define the reports that need to be disclosed by the

organization

The companies can also be asked to follow GRI reportingstandards

FI Encourage the development of sound capital markets

Provide knowledge transfer to local counterparts on how

to conduct scorecard evaluations

Raise awareness of the importance of governance

Banks Supplement bank credit-review and credit-approval

processes with assessments of governance

Make better lending decisions through better risk

assessment


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Red Flags/ Caveats in the Implementation of Scorecard

The potential difficulties that may be encountered are given as follows:

Unrealistic expectations: Expectations about what a scorecard can achieve may be unclear

or unrealistic. Scorecards should not be relied on as the only tool available to reformgovernance practices.

Lack of commitment and participation: There may be insufficient or less than wholehearted

local commitment and participation, especially from key regulators or companies. The local

environment may not have been closely scrutinized for its suitability.

Lack of guidance:The organization may not be able to solicit the help of industry experts

who can guide in the development of a scorecard.

Global Reporting Initiative

GRI is a sustainability reporting technique that is published by the company or organization about

the economic, social and environmental impacts caused by its decisions and actions. This report also

creates a link between its strategy and its commitment to a sustainable global economy.

Sustainability reporting is also considered as synonymous with other terms for non-financial

reporting- triple bottom line reporting, corporate social responsibility (CSR) reporting, and more. In

fact, GRI can be used as the overarching reporting standard that will take into account all the above

mentioned non-financial reporting methods. It is also an intrinsic element of integrated reporting; a

more recent development that combines the analysis of financial and non-financial performance.

The companies can also seek guidance from the following experts that will help them develop the

reporting standards. This will take care of the problems faced due to lack of guidance.

GRI (GRI's Sustainability Reporting Standards)

The Organisation for Economic Co-operation and Development (OECD Guidelines for

Multinational Enterprises)

The United Nations Global Compact (the Communication on Progress)

The International Organization for Standardization (ISO 26000, International Standard for

social responsibility)

The internal benefits experienced due to this reporting method are as follows:

Increased understanding of risks and opportunities

Emphasizing the link between financial and non-financial performance

Influencing long term management strategy and policy, and business plans

Comparing performance internally, and between organizations and sectors

The external benefits include:

Mitigating negative environmental, social and governance impacts

Improving reputation and brand loyalty


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Another point to be considered here is the CSR initiatives of the company. It is always

desired that the CSR practices are aligned with companys business strategy. In fact, it is

appropriate to call Corporate Responsibility (CR) instead of CSR. Therefore, it is always

advised that companies form a special committee for this sole purpose that will look into

various areas of opportunity where it is viable for the company to invest.

4. Measuring the score

Even though the companies are convinced to take part in measuring corporate governance

practices, there may be complacency in conducting the survey and measuring the scores.

Therefore, the management and the board should keep in mind the following key benefits

that can be derived from this scorecard:

Reduction in internal risk due to better control measures

Reduction in legal risk due to compliance

Improvement and efficiency in business model

Improvement in shareholder relations More awareness in doing business in accordance with triple bottom line principle

and creating shared value for both the company and the society

Goodwill and reputation among the clients and the industry

Measure the effectiveness of various committees in the organization like audit,

compensation and nomination committees based on how often they met and the

effectiveness in decision-making

5. Collect and analyse the results

The last step is to gather and analyse the data to study potential gaps and areas of

improvement. Doing this gives the company an idea of how far they are from their

envisioned goals. It also gives them an idea about their next course of action that will help in

eliminating the existing gaps.

Key Concerns Addressed by the Scorecard

The implementation of the scorecard will spread awareness about the importance of CG

practices among all the employees. This will in turn guide them in all the decisions that they

make on behalf of the company and hence, make them accountable for their actions.

The top management including the CEO and the board members will focus on creating

shareholder value through good governance practices. This will bring transparency in

financial records and deals. Also, it will incentivise the board members to take their job

seriously and prevent them from using the veil of ignorance.

There will be top to down communication of companys short term and long term objectives

which will create a sense of ownership amongst all the internal stakeholders. On the flip

side, the employees will be able to track the consequences of their actions in terms of

appraisals and bonuses as this scorecard will be directly linked with compensation. This is

true for the CEO as well. In the long run, the compensation of board members can also be

monitored.


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The company will be entitled to make complete, timely and accurate disclosure of their

material transactions like deals on mergers and acquisitions to the shareholders. Also, care

will be taken to address the interests of minority shareholders. The practices that led to

short term increase in share prices of the company which in turn compromised their future

holding in the industry will be curbed to some extent.

The structure and the composition of the board will have to follow the norms stated under

the Companies Act, 1956 where the chairman and CEO have to be 2 different individuals.

Also, 1/3 of the board members should be non-executive independent directors. At least the

latter practice will have to be followed in order to ensure that there is no case of

complacency or favouritism towards the company and that the task of mentoring and

monitoring are done effectively.

Along with audit, compensation and nomination committees, the company will have to

establish a Corporate Governance committee that will oversee the operations and functions

of all the committees and take care of any discrepancies that might arise in the course of

time. This committee should be chaired by a non-executive independent director in order tomaintain its credibility.

The CR committee will address the issue of developing a sustainable business model that will

strike a balance between shareholder value creations as well as various social initiatives that

are supposed to improve the lives of the people in the society through medical, education

and sanitation facilities, etc.

In the end all the entities directly/ indirectly influenced by an organizations practices have to work

in tandem to bring out a holistic change in the industry.


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Limitations of Corporate Governance Scorecard

1. Even though there are questions that deal with the conduct of directors, management and

employees of companies, the scorecard is not really designed to measure the ethical behaviour of

those responsible for the stewardship of the companies. This is because, ethical behaviour is not

absolute and even after covering all the avenues, there will be some loopholes always.

2. Continuous implementation of the scorecard over a period of time will also train the responses of

the people and there will be proxies in place that will bring down the authenticity of the result of the

survey. This generally happens when employees see that no actions are taken towards good

governance practices and they realise that their genuine opinions do not matter in the organisation.

3. In spite of all the regulations, there are only few policies and practices that the listed companies

are liable to disclose. Also, there is no guarantee that they are actually following the god governance

practices. The implementation may be only in form and not in substance.

4. Since the direct benefit of implementing the scorecard is achieved after a considerable period of

time, the top management may not have the time or the inclination to do it sincerely. This is

because each executive including the CEO has a limited tenure within which he has to deliver results

to the board and the shareholders. Good governance practices are mere luxuries that they cannot

afford to indulge into.

5. There is a considerable amount of challenge from the side of the shareholders as well. Most of the

times, their sole motive is to only make money irrespective of the means used by the company. This

leads to constant pressure on the management to achieve profits and more often than not, it is

achieved through the forbidden methods. It also creates hindrance in the path of CorporateResponsibility. The major issue here is the lack of long term vision among the shareholders that may

hamper the implementation of the scorecard. The shareholders do not understand the benefit of

spending money in activities that do not add to their bottom line.


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The society in which an organization operates forms the most affected party but they receive the

least focus. As we go higher up the pyramid, the level of control exerted on the decision making

policies increases disproportionately. It is this situation that has led to the concentration of wealth

and power in the hands of few individuals whereas the majority of the population is still fighting for

equitable treatment.

SBI- Corporate Governance in Banking Sector

Corporate Governance in banking sector involves the manner in which board of directors and senior

management govern the banking process because that affects their daily operations, corporate

objectives, interests of shareholders and stakeholders and also to check that while doing all this if

banks are following all the rules and regulations and are protecting the interests of depositors.

Though banking sector is one of the most regulated sectors in India but the rules and regulations

have not been implemented effectively over the years. The sturdiness of banking institutions in

following the good governance practices is of paramount importance because the economy of the

country depends on how they function. Otherwise, we might as well be the harbinger of the next

recession in the coming years. And Corporate Governance Scorecard helps in finding out where do

the banks lag in implementation part. Banks activities need to be evaluated regularly because the

activities are not transparent and so it becomes difficult for the shareholders, creditors, investors

etc. to monitor the banks and corporate governance scorecard helps in doing so. And protect the

depositors interestso that they are not ignored by the interest of shareholders and board members.

How is it calculated?

A predefined set of questions is made and to every question a certain weight is allotted andinvestors, fund managers, brokers/sub-brokers are asked to give ratings and this is compared across

different banks. Inputs from various industry experts are taken into account while deciding what

should be included in the questionnaire. And then based on this scorecard value, a five point Likert-

Scale is used to grade the bank.

Purpose to answer the following questions

1. What all criteria are given importance by fund managers, financial agents, financial brokers,

advisors for advising to invest into listed companies?

2.

If our Indian banking sector is implementing the corporate norms and the level to which it

has accepted the rules and regulations?

3. If there is any difference in the corporate governance practices that are followed by private

and public banks and if there is on which parameters they are different?

4. How are the banks supplementing bank credit-review and credit-approval processes with

assessment of governance?

5.

If banks are making better lending decisions through better risk management?

6. How transparent are the banks in disclosing their financial transactions and deals?


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Questionnaire Table:

Score Assigned - It represents how important the parameter is, higher the score value, important the

parameter is.

No Corporate Governance Parameters ScoresAssigned

Year 1 Year 2 Year 3

1 Statement of Company's philosophy on code

of governance

2

2 Structure and strength of Board 2

3 Disclosure of Tenure and Age limit of directors 2

4 Post Board meeting follow up system and

compliance of the board procedures

2

5 Appointment of lead independent director 2

6 Disclosure of other provision as to the boards

and committees

1

7 Code of Conduct 2

8 Board committee 25

9 Disclosure and Transparency 25

10 General Body Meetings 3

11 Means of Communication and General

Shareholder information

2

12 CEO / CFO Certification 2

13 Compliance of corporate governance and

auditor's certificate

10

14 Disclosure of Stakeholders' interests 10

15 Chairman & CEO Duality 5

(i) Promoter executive chairman cum MD/CEO

(ii) Non-promoter executive chairman cum

MD/CEO

(iii) promoter non-executive chairman

(iv) Non-promoter non-executive chairman

(v) Non-executive independent chairman

16 Disclosure of Definition and selection criteriafor (Independent) Directors

3

17 Disclosure of Remuneration Policy &

Remuneration of Directors

2

Total 100

Net Profits


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Five Point Scale used to grade the bank

Score Grade

Excellent 81-100

Very Good 71-80

Good 61-70

Average 51-60

Poor Below 51

Interpretation

Weighted average value is calculated for each value and also each scorecard parameter is arranged

in a ranking order. This helps in realizing that on which parameters a bank is doing well and on which

parameters a bank needs to work on. Corporate governance scorecard is filled every year to check

the parameters and also to improve the low performing parameters.

It helps in finding the following:

1.

The effectiveness of audit committee in preventing fraud

2.

The criterias that are given importance by fund managers, financial agents, financial

brokers, advisors for advising to invest into listed companies

3.

If banks are making better lending decisions through better risk management

4.

Ways in which bank are supplementing credit-review and credit-approval processes with

assessment of governance

5. Parameters in which private and public banks are different in following the different

corporate governance practices

6. The one thing that the questionnaire does not measure is the steps taken by SBI towards

Corporate Responsibility. The main focus of this questionnaire is to satisfy the shareholders

through transparency in financial transactions and deals.

Recommendations for Companies trying to Implement CG Scorecard

Assessment using the Scorecard should be a continuous process, which will require several

iterations before the Scorecard becomes self-sustaining.

Different companies should lead the initiative by rotation.

While assessment and ranking has its own value, especially given that good corporate

governance practices increase shareholder value at least in the medium term, opportunities

for synergy with other regional capital market initiatives should also be explored. The

interconnectedness of regional initiatives increases their sustainability, the sum being

greater than the individual parts.

The international scorecards like the ASEAN scorecard can also be used as a reference point

for the development of national corporate governance frameworks.

Corporate Governance Scorecard

Documents

Transcript of Corporate Governance Scorecard