Corporate governance - Performance and Measurement

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Corporate governance - Performance and
Measurement

• T.V.Mohandas Pai
• Member of the Board and CFO
• Infosys Technologies Limited

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Corporate Governance

• A system of checks and balances between the
  board, management and investors to produce an
  efficiently functioning corporation, ideally
  geared to produce long-term value
• The Conference Board

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Issues in Corporate Governance

• Asymmetry of power
• Asymmetry of information
• Interests of shareholders as residual owners
• Role of owner management
• Theory of separation of powers
• Division of corporate pie among stakeholders

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Current status on corporate governance

• Insistence on forms and structures
• Overarching regulations
• Regulatory overkill
• Lack of adequate number of strong, independent
  directors
• Large liabilities for companies and officers
• Has the pendulum swung too far?
• For the first time in the decade-long history of
  the Index of Economic Freedom, the U.S. is no
  longer among the top ten most free countries
• Wall Street Journal and the Heritage Foundation
  Index of Economic Freedom

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Current status on corporate governance
Comparison of Board structure Indian top 50 Vs U.S. top 50 Key Findings Comparison of Board structure Indian top 50 Vs U.S. top 50 Key Findings Comparison of Board structure Indian top 50 Vs U.S. top 50 Key Findings
Parameter India (Nifty Fifty companies) US (top 50 out of NYSE 100 index)
Ownership pattern 48 of Indian companies have largest shareholder holding over 50 Largest shareholder holds less than 10 in all cases
Board size Largest board size 17. smallest 5 Largest board size 18. smallest 10
44 of the top 50 companies have more than 12 directors 66 of the top 50 companies have more than 12 directors
Board independence 58 of companies have a board majority of independent directors 12 have less than 1/3rd of their directors independent All companies have a board majority of independent directors
Executive directors in board In 35 companies 50 of the directors or more are executive directors Boards of 49 companies out of 50 have less than 25 executive directors
Chairman and CEO 60 have separate Chairman and CEO Only 20 have separate Chairman and CEO
Lead independent director 3 companies have lead independent directors 20 companies have lead independent directors
Board committees All companies have audit committees 54 have fully independent Audit Committees 33 companies have remuneration committees of these 14 fully independent and 16 have majority independent committees 9 companies have nomination committees 6 are fully independent and 3 have majority independent committees All companies have fully independent audit remuneration and nomination committees
Source Crisil Report on Corporate Governance
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Governance and performance

• Good governance leads to good performance
• It creates an open and transparent system
• It improves communication and breaks down
  systematic barriers to flow of information
• Good governance allows decision making based on
  data. It reduces risk
• Good governance helps in creating a brand and
  creates comfort for all stakeholders and society

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Does performance depend on governance

• Short term performance does not necessarily
  depend on governance
• Market asymmetries are responsible for this.
  However, this increases risk. This also creates
  barrier to long term growth
• We all know what happened to Enron?

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Does performance depend on governance

• Medium to long term performance requires
  governance
• Most companies which have grown in the last 25
  years have outstanding performance and have good
  governance structure
• A good governance structure treats all
  stakeholders fairly
• Governance alone cannot ensure performance

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Governance and Performance - issues

• Is governance a luxury that can be afforded only
  by the performing companies?
• Do strategies and tactics need to change to
  accommodate governance with performance?
• Is there a time-lag between governance and
  performance?
• Are stakeholders concerned about performance or
  promised performance ?

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Governance and Performance measurement - issues

• Is governance behavior motivated by legislation?
• Do standards vary with jurisdictions or do you
  adopt the best option?
• Do you choose the right thing to do irrespective
  of whether its mandatory or not?
• Is performance evaluation limited to valuation
  metrics?
• Is it only ROE, Net margin, growth, shareholder
  wealth creation?
• Do performance measures need to be holistic?
• We need to encompass all stakeholders
• Governance is an enabler for holistic performance
• How do managers better understand governance
  requirements?
• Do we need market research for governance
  requirements?

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Investing in Corporate Governance

• Companies need to invest in good governance
• Corporate governance has a direct bearing on
  business performance and thereby ROI
• Leverage the power of IT
• On average, businesses with superior governance
  practices generate 20 percent greater profits
  than other companies
• A study based on 256 companies conducted at the
  MIT Sloan School of Management

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Thank You