Corporate Governance: Tool for Competitiveness

CA Ramesh Chandak

MD & CEO, KEC International Limited

Corporate Governance (CG)- A difficult subject today In today’s environment with the collapse of

Lehman Bros., AIG difficult to speak on CG These companies practised CG in compliance with

Sarbanes Oxley and requirements of the NYSE & NASDAQ

Yet they went down the dumps Until the time the tide is high, difficult to identify

who is complying with CG Only when the tide goes low, one who is

swimming naked is exposed Overnight the love affair with the stock market

ended2

Global Business Environment & CG The world today has become flat The dynamism of the business environment has

ensured that business is done to Expand operations globally Attract capital globally

Competitiveness has become very critical not just for growth but for survival itself

In current turmoil maximization of available resources is critical: men, money, machines, market, etc.

Globalization has made CG an important framework condition affecting business competitiveness

3

CG - Need for Overall Competitiveness Corporate Governance now being increasingly

considered by:

The ability to demonstrate corporate governance has become a requirement for growth and reduction of cost of capital4

CG- Widely Covered Topic Many legislations

Sarbanes Oxley NYSE/NASDAQ Rules Clause 49 of listing agreement in India

Surveys Literature Articles by various experts Numerous definitions of CG Theoretically, these have put CG in black and

white

5

No Black and White only GREY Reasons:

We are never even near perfect situation which is difficult to define

Vary from place to place, country to country – highly subjective

Regimeof bribes

Govt.interference

High taxrate

Casheconomy

Culturaldifference

Tax evasion

Politicalinfluence

Corporate GovernanceGrey Areas

6

CG – A subjective concept in practice Before the crisis, stocks were booming even under

veil of secrecy Investors from USA and other places were investing

funds despite the view that things were not always done in a most transparent and professional manner

Acceptance of this behavior by investors was justified on the ground that “things are done differently here”

Investors were making good returns on their investments, albeit with high risk

In greed, companies ignore CG An opportunistic view of CG is taken by them

7

CG – A subjective concept in practice Accounting professionals would have witnessed

and evaluated CG practices in companies like Lehman Bros., AIG

Evaluation was too theoretical They never thought that this could happen to them The current turmoil wasn’t sudden, there were

signals but we ignored them Failure of these companies has made evaluation of

CG very challenging A matter of high subjectivity Will have to move from compliance to in-depth

evaluation8

CG – Definition – Theory Vs Practice World Bank Definition: ‘about promoting

corporate fairness, transparency and accountability’

In practice, ‘CG goes beyond and looks into the implicit and explicit relationships of the company with all stakeholders’

One of the key elements of improving economic efficiency and competitiveness is through effective corporate governance practices

9

Effective CG Practice No single model of good CG practice; it is more than

transparency Regulation alone can not ensure good governance

Discipline and Self Assessment –very important10

CG- Issues Owner-driven Companies

Independent Directors

Empowering Employees

Business Restructuring

Regulatory Environment

11

CG – A matter of Perception Many times perception of CG define the preference

of a company

All companies comply with requirements of CG as per the regulations

But we have our perceptions of which one is better

12

Performance with Governance

13

Low Premium

Low Premium

Outstanding

Disaster

Good

Bad GoodP E R F O R M A N C E

Lift the veil of secrecy for true spirit

14

In Conclusion Clause 49 and Sarbanes Oxley are sacrosanct But these need to be supplemented by following

CG in spirit by inculcating self-discipline and integrity in the DNA of the company

Companies which practice CG both in letter and spirit and do not take only opportunistic view will attract Capital at lower cost Lower lending rates Better vendor network Wider global reach

Respect from the society This will increase competitiveness

Better profitability Higher market share

CG – important in today’s flat world to survive, grow and make profits15

Thank You