T. V. Mohandas Pai

8/7/2019 T. V. Mohandas Pai

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Corporate Governance

and Capital Markets

Corporate Governance

and Capital Markets


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Corporate Governance and Capital Markets

Source: A McKinsey Survey of Global Investors


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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 compensatedby adoption of aggressive accounting practices

Ignored ethics and value systems when a muchhyped 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


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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


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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 Magazines Person of the Year


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Key Themes of Current Reforms

Independent directors and audit committees have enlargedresponsibilities

Stricter independence standards for audit committees

Enhanced role of the whistle blower

Board effectiveness and integrity targeted by regulators, politiciansand 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 becertified

Improved processes and controls have connected the board to the day today functioning of the company

Real time disclosure and shortened deadlines

Auditor independence

Repeal of self regulation for the auditing profession

Analyzing the analysts


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Corporate Governance and Capital Markets

Investment is an act of faith Poor governance

Undermines integrity of corporations and discourages the use of public

markets as a means to intermediate savings

Particularly the areas of transparency and disclosure have been a major

factor behind instability in the financial markets across the globe

Good corporate governance

Essential pre-requisite for the integrity and credibility of capital market

players

Contributes to the development of a vibrant economy and robust capital

markets

Recent events have repeatedly proven the importance of corporate

governance standards, including the collapse of large global

corporations


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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 MostFree Countries

Wall Street Journal and the Heritage Foundation Index of Economic

Freedom India is not even in the list of Top 10


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Greater emphasis on leadershipby example

Boards are returning to basic

value systems Each culture should look back to

its roots for value systems Indias centuries old principles of

Dharma Strengthening

the moral fiber

of the

corporationValue systems are helpingbuild 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?


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Strengthening capital markets through corporate

governance

Improving the tone at the top Code of ethics - Not an annual exercise.talk about and demonstrate

the company's ethical standards again and again

Get colleagues, business heads to speak about core values

Make ethics part of the companys DNA

When someone does commit an ethical violation, a company shouldmove to fix the problem and remedy the harm as quickly as possible.

It also has to take appropriate action against the offending employee -swiftly and firmly, even if the offending employee is a star performer

Hold all of your managers accountable for setting the right tone.

That means disciplining or even firing them when they have failed tocreate a culture of compliance

CXOs themselves have to comply with the letter and the spirit of therules


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Strengthening capital markets through corporate

governance

Make character a part of the set of key hiring criteria

Make integrity, ethics and compliance part of the

promotion, compensation and evaluation processes as

well

Listen to employees including the bad news

Deliver the message of integrity,honesty and truthfulness

to those with whom you do business

Make it clear that you won't tolerate compliance risks -even if that means losing a lucrative piece of business or

a client or a transaction


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T. V. Mohandas Pai