T. V. Mohandas Pai
Transcript of T. V. Mohandas Pai
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Corporate Governance
and Capital Markets
Corporate Governance
and Capital Markets
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Corporate Governance and Capital Markets
Source: A McKinsey Survey of Global Investors
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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 compensatedby adoption of aggressive accounting practices
Ignored ethics and value systems when a muchhyped 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
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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
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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 Magazines Person of the Year
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Key Themes of Current Reforms
Independent directors and audit committees have enlargedresponsibilities
Stricter independence standards for audit committees
Enhanced role of the whistle blower
Board effectiveness and integrity targeted by regulators, politiciansand 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 becertified
Improved processes and controls have connected the board to the day today functioning of the company
Real time disclosure and shortened deadlines
Auditor independence
Repeal of self regulation for the auditing profession
Analyzing the analysts
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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
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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 MostFree Countries
Wall Street Journal and the Heritage Foundation Index of Economic
Freedom India is not even in the list of Top 10
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Greater emphasis on leadershipby 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
corporationValue systems are helpingbuild corporate governance
framework for companies
Boards are redefining value
creation Not merely increase in stock
prices
What is the Current Status on Corporate Governance Practices?
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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 shouldmove 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 tocreate a culture of compliance
CXOs themselves have to comply with the letter and the spirit of therules
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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
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Thank YouThank You