Corporate Governance Corporate Social Responsibility

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					Corporate Governance & Corporate Social
       Enhance Stakeholders’ Value

                P.K. Choudhury,
          Vice Chairman, ICRA Limited

              November 22, 2008
“It is not from the benevolence of
  the butcher,the brewer,or the
  baker that we expect our dinner,
  but from their regard to their own
  interest. We address ourselves,
  not to their humanity but to their
  self love, and never talk to them
  of our necessities but their
                         Adam Smith
"One and only one social
 responsibility of business is to
 increase profits so long as it
 stays within the rules of the game,
 which is to say, engages in open
 and free competition without
 deception or fraud."

             - Milton Friedman-
         Nobel Prize in Economics,
   Triple Bottom Line Framework
Economic Sphere                         All organisations have three dimensions
 Maximise                              to their strategies and operations
  shareholder value
 Market share
                                                Environment sphere
 Current profits         Economic               Eco-friendly products
                                                 Recycling waste
                                                 Climate protection
                                                 Emissions control
                      Social   Environment

  Social sphere
   Community well-
    being                                    How to move the three spheres
   Regional                                 closer? How to align Social and
   Local issues                             Environmental spheres with the
                                             Economic sphere?
Recent Emergence

 •   Poverty and insecurity worldwide
 •   Anti- globalisation calls
 •   Mistrust of large corporations
 •   Greater media/IT reach
 •   Increased stakeholder activism
     including increasing investor pressure
 •   Increasing government interest/action

• Economic impact of large corporations
  becoming more profound
• Of the 100 largest economies of the world
  51 are Corporations
• 161 countries of the world have
  economies smaller than Wall-Mart
• The sales of 200 firms of the world is
  equivalent to appx. 28% of world‟s GDP

• Professional Managers have enormous
• The powers could be misused.
• The „owners‟ need to have a control.
• The minority shareholders need to be
• The conflicting interests of different
  stakeholders have to be balanced.
    Transparency & Disclosures
         “The Foundation of any structure of
         Corporate Governance is disclosure.
     Openness is the basis of public confidence
    in the corporate system, and funds will flow
       to the centres of economic activity that
        inspire trust.”   - Sir Adrian Cadbury
      “As more countries move to an equity
    culture, high quality financial information
      becomes the currency that drives the
           marketplace” - Arthur Levitt

               When in doubt, disclose
    What, if any, are the benefits of
    good corporate governance ?
    • According to OECD, only companies with
      credible and well understood corporate
      governance practices would be able to
      attract long-term capital

    • However, financial theory is yet to
      establish the linkage

    • Empirical evidence is available
      – McKinsey Investors Opinion Report
     Does better corporate governance
     deliver higher shareholder returns ?
     To ascertain this, McKinsey & Co. in
      cooperation with the world bank
      conducted a series of surveys

     The survey gathered response from over
      200 institutional investors managing
      approx. US$2 trillion in assets. 40% of
      the respondents were based in the U.S.,
      balance in Europe, Asia and Latin
     Most investors say that board practices are at
     least as important as financial performance
     Q: In evaluating companies for potential investment, how important are
     board practices relative to financial issues?

                                                      25        More
                         48                                     Important

                                                      39        Same

                                                      36        Less
                         20                  23                 Important
                 Latin America              Asia   Europe/US

       Source: McKinsey Investor Opinion Study
 Most investors would be willing to pay
 more for the shares of a well-governed
     Q: Would you be willing to pay more for a company with good board
     governance practices?


                           83                              81            Yes
                           83                              81

                           17                              19            No
                           17                              19
                   Latin America                 Asia   Europe/US
       Source: McKinsey Investor Opinion Study
     The premium that investors would
     be willing to pay is significant
     Q What percentage premium do you estimate you would be willing to
     pay for the stock of a well-governed company?





             Latin America         Asia         Continental   US/UK
      Source: McKinsey Investor Opinion Study
 Major corporate measures
 looked at
  Importance of Corporate Level Factors when Selecting Emerging Market
  Companies in Which to Invest            0
                                         Irrelevant 1             3
                                                         2 Relevant      4        5
 Distinctions between company and family interests

          Clearly defined governance arrangements

                    Accuracy of financial reporting

Legally enforceable minority shareholder protection

Use of performance-related pay for top management

                   Timeliness of financial reporting

                    Coverage of financial reporting

  Presence of independent (non-executive) directors

   Establishment of conflicts of interests committee
     Why do Stakeholders care about
     Corporate Governance ?
     • Financial reports and other disclosures
       can be trusted
     • Comfort With Product & Service Offerings
     • Assurances of Timely Servicing of
     • Well governed companies mitigate „non-
       business‟ risks
     • Believe that corporate performance in
       the long run is correlated with CG/CSR
15   • Trust of Regulators
 ICRA‟s C G R Scale
     • CGR1 – Highest level of corporate governance
     • CGR2 – High level of corporate governance, but not         as
       high as in CGR1
     • CGR3 – Adequate level of corporate governance
     • CGR4 – Moderate level of corporate governance
     • CGR5 – Inadequate level of corporate governance
     • CGR6 – Poor level of corporate governance

       A sign of „+‟ may be added as a suffix to the rating symbol for
       all categories except CGR1, to indicate the relative position of
       the company within the group represented by the rating symbol

 ICRA‟s SVG Rating Scale
     • SVG1 – Highest category on composite parameter of
         stakeholder value creation and management as also
         corporate governance practices
     •   SVG2 – High category…..
     •   SVG3 – Adequate category…..
     •   SVG4 – Moderate category…...
     •   SVG5 – Unsatisfactory category……
     •   SVG6- Lowest category…..
         A sign of „+‟ may be added as a suffix to the rating
         symbol for all categories except SVG1, to indicate the
         relative position of the company within the group
17       represented by the rating symbol