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Corporate Governance and Capital Markets

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Corporate Governance and Capital Markets. T. V. Mohandas Pai. Member of the ... Aggressive journalism. Accounting/Governance was the main story for months ... – PowerPoint PPT presentation

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Title: Corporate Governance and Capital Markets


1
Corporate Governance and Capital Markets
  • T. V. Mohandas Pai
  • Member of the Board and CFO
  • Infosys Technologies Limited

2
Corporate Governance and Capital Markets
Source A McKinsey Survey of Global Investors
3
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

4
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

5
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 MDA 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

6
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

7
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

8
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

9
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
  • Indias centuries old principles of Dharma

Strengthening the moral fiber of the
corporation
Value systems are helping build corporate
governance framework for companies
  • Boards are redefining value creation
  • Not merely increase in stock prices

10
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 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

11
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

12
Thank You
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