Corporate Governance and implications in india

Corporate Governance and implications in india

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  Corporate Governance BMN 533 SPRINGSEMESTER: MBA 4th TERM STRATEGY & BUSINESS POLICY Presented to Prof. Vinay Sharma Department of Management Studies Indian Institute of Technology Roorkee
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  • Corporate governanceis the system of rules, practices and processes by which a company is directed and controlled. • Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders are balanced. • Effective corporate governance ensures that the interests of stakeholders are protected, and the company operates with integrity, transparency, and accountability. Basics of Corporate Governance?
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  Corporation There are twomain views on the nature and purpose of a corporation: • Legal fiction: A corporation is simply a legal agreement among shareholders to run a business for their benefit. • Real entity: A corporation is a real entity with power and influence that has responsibilities to society, not just shareholders. • Today, the debate is about whether corporations should focus on maximizing shareholder wealth or have a broader purpose that benefits society. • There are new developments in the US and Europe that suggest corporations should have a broader purpose • UK: The Purposeful Company Taskforce and revisions to the Corporate Governance Code encourage companies to define and document their purpose, considering stakeholders beyond shareholders. • US: In the US, a notable shift came from the Business Roundtable, a powerful group of CEOs. Their 2019 statement reversed their prior stance on shareholder primacy and declared a commitment to all stakeholders, including employees, customers, and communities. • India: the India's Companies Act, 2013 mandates Corporate Social Responsibility (CSR) activities. This suggests a legal nudge for companies to consider the impact on society, not just profits.
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  Role and Responsibilities: Shareholdersare the owners of a company and provide capital through buying shares. Shareholders Their rights and powers vary depending on the type of share they hold and local regulations. Traditionally, shareholders have voting rights on certain corporate matters and the right to receive dividends. Recent trends show an increase in shareholder concentrationwith large passive investors like index funds holding significant stakes. These developments raise questions about accountabilityof shareholders and the prevalent model of shareholder value maximization as the sole goal of governance.
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  • The boardis the governing body responsible for overseeing the company's business and affairs. • Board members have a fiduciary duty to act in the best interests of the corporation and its shareholders. • They delegate day-to-day operations to the executive team but retain oversight of key functions like strategy, financial reporting, risk management, and CEO selection/compensation. • Board structures and selection processes vary by country. • There's a growing trend of increased female representation and a focus on having more independent directors with no significant ties to the company. • High-performing boards are emphasizing self- assessment, succession planning, and diversity in skills and backgrounds. Role and Responsibilities Composition and Trends Board of Directors
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  • Executive compensationparadigms refer to the principles and frameworks guiding the remuneration of top-level executives, particularly CEOs and other senior leaders. • These paradigms are designed to align executive incentives with the company's goals, performance, and shareholder interests. • Traditional compensation models have been criticized for incentivizing short-termism and excessive risk-taking, leading to the evolution of newer paradigms aimed at promoting long- term sustainable growth. • According to the Economic Policy Institute, the CEO-to- worker pay ratio at the 350 largest U.S. companies increased from 20-to-1 in 1965 to 312-to-1 in 2017. • A more recent effort to curb CEO pay growth in the U.S. requires companies to disclose the ratio of CEO-to-median employee pay on an annual basis. In 2018, the proxy statements of most U.S. public companies included this ratio for the first time. Executive Compensation
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  • Total ShareholderReturn (TSR): Measures the total return received by shareholders through stock price appreciation and dividends over a specific period. • Earnings: Focuses on the company's profitability and financial performance, typically Aggressive targets and metrics, such as Total Shareholder Return (TSR) and earnings growth, have influenced executive behavior and decision-making, albeit with potential risks of short-termism and unethical conduct. Commonly Used Metrics in Executive Pay Programs Evolution Towards Non-Financial Metrics: •Non-financial metrics may include measures related to innovation, quality, customer satisfaction, corporate culture, sustainability, and social responsibility. •Companies are recognizing the importance of considering broader stakeholder interests beyond financial returns and are integrating environmental, social, and governance (ESG) factors into executive pay structures.
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  Resource Allocation inCompanies Companies allocate financial resources to investments based on their strategy. Ideally, this strategy considers future market changes, competition, and broader social/environmental factors. The allocation process should result in continuous innovation and customer satisfaction, while generating profits. Boards play a crucial role in overseeing resource allocation decisions within corporations. They are responsible for ensuring that resources are allocated in alignment with the company's strategic objectives and long-term sustainability.
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  • Pressure fromshareholders with short-term goals can lead to neglecting long-term investments in areas like research and development, training, and sustainability. • Traditional financial analysis tools may not consider the broader human, environmental, and social costs of decisions. • The significance of short-termism and the impact of share buybacks are debated among academics. Challenges Boards need to better understand their resource allocation processes and consider long-term human, environmental, and social impacts. Improved oversight, communication with investors, and potentially new metrics for long- term value creation are needed. More radical innovation in strategy development and resource allocation is a possibility. Recommendations:
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  • Corporate performanceis a measure of how well a company achieves its goals. • Different stakeholders (investors, lenders, employees, etc.) have different needs when evaluating performance. • There's no single perfect way to measure performance, but some common metrics include: • Stock price(e.g. Total Shareholder Return) - Easy to compare across companies but can be influenced by short-term investor bias. • Accounting measures(e.g. Return on Equity) - Considered backward-looking and manipulable, but less affected by investor focus. • Non-GAAP measures(e.g. adjusted income) - Aim to address limitations of traditional accounting metrics. • Time horizon is another challenge. Short-term reporting (quarterly, annually) may not reflect long-term goals. Corporate Performance
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  Addressing the complexities: •Balanced scorecard approach:Measures short-term indicators that contribute to long-term success (e.g., patent filings for a technology- focused company). • Example: A company using a balanced scorecard might track the number of new product ideas generated by employees (short-term) to measure progress towards its long-term goal of innovation. • Social and environmental performance:Companies are increasingly measured on factors like diversity, environmental impact, etc. The link between these and financial performance is debated, but some argue it's important for long-term success or corporate social responsibility. • Example: Investors might look at a company's carbon emissions alongside its financial performance to assess its environmental impact and potential financial risks or opportunities related to climate change.
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  The board's rolein overseeing risk • Traditionally, boards focused on financial risks like accounting errors. • Now, boards are expected to oversee a wider range of risks including Executive misconduct, Cybersecurity breaches, Environmental damage Unethical supply chain practices • This broader role challenges traditional oversight methods. How boards are adapting • Strengthening internal controls: Boards have adopted new oversight protocols. Some have created dedicated risk committees or assigned risk oversight to specific committees. • Focus on corporate culture: Recognizing culture can drive risk, boards are learning about its influence. Corporate Oversight
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  Importance of RobustRisk Oversight for Sustainable Growth • Robust risk oversight is essential for ensuring sustainable growth and profitability. • By proactively managing risks, boards safeguard the company's reputation, protect shareholder value, and enhance stakeholder confidence. • Effective risk management enables boards to anticipate and address potential threats, capitalize on strategic opportunities, and navigate complex business environments with agility. • Risk committees oversee diverse risk categories, including conduct risk, cyber risk, supply chain risk, and environmental risk. • Chief risk officers collaborate with management to develop risk management strategies, implement risk mitigation measures, and provide regular updates to the board on emerging risks and trends Role of Risk Officers
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  Corporate reporting isthe process by which companies communicate their financial and non-financial information to stakeholders. • Key Challenges: ○ Globalization:Different countries have different accounting standards (US GAAP vs IFRS). This makes it difficult to compare companies across borders. ○ Fair Value Accounting:This method requires estimating the current market value of assets, which can be subjective and require strong audit oversight. ○ New Business Models:Rapid technological advancements create new business models that lack established performance measures. ○ Non-Financial Reporting:Increased demand for disclosures on social and environmental impact (e.g., sustainability reporting). Corporate Reporting
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  Responses to Challenges •Efforts to harmonize accounting standards (e.g., convergence of US GAAP and IFRS). • Increased reliance on audit committees to ensure the integrity of reported figures. • Development of frameworks for non-financial reporting (e.g., GRI, IIRC). • India adopted International Financial Reporting Standards (IFRS) as IND- AS in 2014. • Mandatory for Listed Companies: Since 2014, IND-AS are mandatory for all listed companies and large companies exceeding specific size thresholds. This ensures greater comparability between Indian companies and their global counterparts. • Enhanced Transparency: By following a common set of accounting principles, IND-AS promotes transparency and improves the quality of financial information available to investors and other stakeholders. Indian Perspective (IND-AS)
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  Case Study-Infosys Key Governance Challenges Governance Reforms Outcomesand Lessons Founders' Conflict: In 2017, Infosys faced a crisis when co-founder N.R. Narayana Murthy raised concerns about alleged corporate governance lapses, including executive compensation and board appointments. The conflict led to the resignation of CEO Vishal Sikka and several board members. Executive Turnover: Infosys witnessed a series of CEO changes within a short span, raising questions about stability and strategic direction. Board Overhaul: In response to the governance crisis, Infosys revamped its board composition by appointing new independent directors with diverse expertise and experience. Stakeholder Engagement: Infosys prioritized engagement with stakeholders, including shareholders, customers, employees, and the broader community, to rebuild trust and transparency. The governance challenges faced by Infosys underscored the importance of proactive governance practices, effective stakeholder management, and transparent communication. Governance reforms helped restore confidence in Infosys' leadership and governance structures, reaffirming its commitment to integrity and ethicalconduct. Infosys is a leading Indian multinational corporation that provides consulting, technology, outsourcing, and digital services.
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  Thank You