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Corporate Governance and Capital Markets - National Foundation .ppt

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					Corporate Governance
and Capital Markets


T. V. Mohandas Pai
Member of the Board and CFO
Infosys Technologies Limited
Corporate Governance and Capital Markets




Source: A McKinsey Survey of Global Investors
                                                2
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


                                                                           3
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



                                                                             4
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


                                                                          5
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
                                                                               6
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


                                                                                  7
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




                                                                           8
What is the Current Status on Corporate Governance Practices?


 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
 Value systems are helping                   corporation
 build corporate governance
 framework for companies



 Boards are redefining value
  creation
 • Not merely increase in stock
   prices



                                                             9
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 company’s DNA
» When someone does commit an ethical violation, a company should
  move 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 to
     create a culture of compliance
» CXOs themselves have to comply with the letter and the spirit of the
  rules



                                                                               10
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


                                                               11
Thank You

				
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