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
What went wrong in the recent past?

» Environment
  » Loss of moral fibre of corporations
  » Business environment characterized by need to compete with the new
» 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 ?

» 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
» 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

» Independent directors and audit committees have enlarged
» 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
     » 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
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
  » Contributes to the development of a vibrant economy and robust capital
» Recent events have repeatedly proven the importance of corporate
  governance standards, including the collapse of large global

What is the Current Status on Corporate Governance
» 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
   » India is not even in the list of Top 10

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
 • Not merely increase in stock

Strengthening capital markets through corporate
» 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

Strengthening capital markets through corporate

» 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
» 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

Thank You

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