Corporate Governance
and Capital Markets
T. V. Mohandas Pai
Member of the Board and CFO
Infosys Technologies Limited
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 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
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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
4
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 Magazine’s Person of the Year
5
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
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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 “Most
Free 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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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
• India’s centuries old principles of
“Dharma”
Value systems are helping
build corporate governance
framework for companies
Strengthening
the moral fiber
of the
corporation
Boards are redefining value
creation
• Not merely increase in stock
prices
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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 company’s 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
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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 You