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Theme: Lead Corporate India - Role of Company Secretary
37th National Convention of Company Secretaries
Integrity, Ethics & Governance
Vijaya Sampath
5 November 2009
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Two facets of governance :From Lehman to Satyam 2008-09
CORPORATE SCANDAL
Board, auditors, topmanagement accountable :disgrace and jail sentences forsenior promoters &management
Impairment to shareholders,employees, lenders &reputation
Speedy state intervention :liquidation prevented
Temporary dent in reputationfor India and governance
Continues under newmanagement
FINANCIAL MELTDOWN
No personal / criminalliability on Board, auditors ortop management
Financial community and
general public also affected
Trillion dollar bailoutsovernight by governments inUS & Europe to othercompanies post collapse
Global crisis : cascadingeffect on entire community
Tenure : 1840 - 2008
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Organization Stakeholders
Board of Directors
Managem
en
t
Public
Supp
liers
Enforcem
ent®ulatory
authorities
CreditorsShareholders
Promoters
Business
partn
ers
Custome
rs
Staff/E
mp
loyees
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What needs correction
Level of responsibility of BoardsLevel of responsibility of Boards
Boards followed accepted standards for functioning: all testsBoards followed accepted standards for functioning: all tests
passed:passed:
-- Composition : size, age, diversityComposition : size, age, diversity
-- Skills and experienceSkills and experience
-- AttendanceAttendance
-- CommitteesCommittees-- Internal control systemsInternal control systems
-- IndependenceIndependence
-- Access to information : volume perhaps but quality questionableAccess to information : volume perhaps but quality questionable
Failure due to lack of knowledge, negligence, incompetence orFailure due to lack of knowledge, negligence, incompetence or
collusion: Can a Board take shelter under business judgment rulecollusion: Can a Board take shelter under business judgment rule Board and management replaced : new facesBoard and management replaced : new faces
Rules, process, procedures and norms cannot override vigilant orRules, process, procedures and norms cannot override vigilant or
involved Directors.involved Directors.
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Conflicting stakeholder expectations
Owners and strategic investors: Long term financial and businessOwners and strategic investors: Long term financial and business
successsuccess Retail shareholder: Short term market cap gains and dividendsRetail shareholder: Short term market cap gains and dividends
Lenders: Security of their loansLenders: Security of their loans
Business managers: Direction, guidance and counsel on strategyBusiness managers: Direction, guidance and counsel on strategy
and policy.and policy.
Staff and employees: Continuing career growth & development :Staff and employees: Continuing career growth & development :
Integrity & value systems.Integrity & value systems.
Customers: Products, services & support : high quality at the rightCustomers: Products, services & support : high quality at the right
price.price.
Business partners: Confidence on Good to do business withBusiness partners: Confidence on Good to do business with Suppliers: Business continuity and sanctity of contractsSuppliers: Business continuity and sanctity of contracts
Community: Business commitment meeting its corporate socialCommunity: Business commitment meeting its corporate social
responsibility, values and integrityresponsibility, values and integrity
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Making good Boards great
Fighting the wrong battle if procedure rules tightened and humanFighting the wrong battle if procedure rules tightened and human
elements ignoredelements ignored
Board effectiveness : critical requirementsBoard effectiveness : critical requirements
-- fearless independencefearless independence
-- engages with senior managementengages with senior management
-- functions as a team : chemistry and communicationfunctions as a team : chemistry and communication-- cycle of respect, trust and candorcycle of respect, trust and candor
-- open and constructive dialogueopen and constructive dialogue
-- fluid portfolio of roles : no typecastingfluid portfolio of roles : no typecasting
-- individual accountabilityindividual accountability
--
evaluation of performance and effectivenessevaluation of performance and effectiveness
TransitionActive direction
Conscience keeperCrony of Promoter
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Ideal qualities
Asks the hard questions, constructive dissentAsks the hard questions, constructive dissent
Works well with othersWorks well with others Provides valuable inputs objectivelyProvides valuable inputs objectively
Available when neededAvailable when needed
Alert, inquisitive and involvedAlert, inquisitive and involved
Contributes to discussions constructivelyContributes to discussions constructively Actively seeks information from management : probes asActively seeks information from management : probes as
requiredrequired
Prepares for attending meetings : active engagementPrepares for attending meetings : active engagement
No hidden agendas or vested groupsNo hidden agendas or vested groups
Responsible only to the organizationResponsible only to the organization
Not disruptive in pursuit of statutory responsibilities butNot disruptive in pursuit of statutory responsibilities but
constructive in individual accountabilityconstructive in individual accountability
Able to strike a balance between governance oversight andAble to strike a balance between governance oversight and
providing constructive advise / supportproviding constructive advise / support
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Ability to add value
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Going Global
Urge to change emerging statusUrge to change emerging status
Growth stagnating in mature marketsGrowth stagnating in mature markets
Shareholder base becoming more institutional and internationalShareholder base becoming more institutional and international
Listing in multiple jurisdictionsListing in multiple jurisdictions
Business going global : inbound and outbound consolidationBusiness going global : inbound and outbound consolidation
International acquisitions and opportunitiesInternational acquisitions and opportunities
Fungibility of suppliers : products and servicesFungibility of suppliers : products and services
Global movement in factors of production : capital, people, assetsGlobal movement in factors of production : capital, people, assets
Dismantling of state monopolies : in many emerging economiesDismantling of state monopolies : in many emerging economies
Shifting economic power from mature to high growth marketsShifting economic power from mature to high growth markets
Optic fiber and capital markets link what geographic boundaries kept apartOptic fiber and capital markets link what geographic boundaries kept apart
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Positives of good governance
Easier access to global markets : Acceptability factorEasier access to global markets : Acceptability factor Increased investor and lender confidence, goodwillIncreased investor and lender confidence, goodwill
Higher valuations and market capsHigher valuations and market caps
Improved checks and balances : reduces organizational riskImproved checks and balances : reduces organizational risk
exposureexposure
Company performance : effectiveness & efficiency of businessCompany performance : effectiveness & efficiency of business
operationsoperations
Building a universal culture of values, integrity and transparencyBuilding a universal culture of values, integrity and transparency
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Positives of good governance
Institutionalize best practices and create next practiceInstitutionalize best practices and create next practice
Supports informed decision making at management andSupports informed decision making at management and
Board levelBoard level
Identifies and exploits areas of risk based advantageIdentifies and exploits areas of risk based advantage
Attracts talent : preferred employer of choiceAttracts talent : preferred employer of choice
Allows proactive risk stewardship not reactive defenseAllows proactive risk stewardship not reactive defense
Enables independent directors to decide with comfort andEnables independent directors to decide with comfort and
confidenceconfidence
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Issues
Impact of globalization and financial crisis since 2000Impact of globalization and financial crisis since 2000
Information asymmetry : different stages of economicInformation asymmetry : different stages of economic
developmentdevelopment
Internal opaqueness : aspirations Vs expectationsInternal opaqueness : aspirations Vs expectations
Increasing participation / intervention of overseas investorsIncreasing participation / intervention of overseas investors Independent director: shift from periphery to center stageIndependent director: shift from periphery to center stage
Enforcement and monitoring mechanisms : internal & externalEnforcement and monitoring mechanisms : internal & external
Establishing and maintaining consistent high standardsEstablishing and maintaining consistent high standards
Risk Vs EntrepreneurshipRisk Vs Entrepreneurship
Board dynamics managementBoard dynamics management
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Concerns & Challenges
Substance over form : paradigm shiftSubstance over form : paradigm shift Giver or taker : who bears more blameGiver or taker : who bears more blame
Cultural and organizational differences : unity in diversityCultural and organizational differences : unity in diversity
Conflicting expectations from stakeholdersConflicting expectations from stakeholders Level of care and diligence: early warning signalsLevel of care and diligence: early warning signals
Universal values & standards : common meeting groundUniversal values & standards : common meeting ground
Emphasis on profitability : surviving in hyper competitionEmphasis on profitability : surviving in hyper competition Speedy results : ends Vs meansSpeedy results : ends Vs means
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Challenges
Higher exposure to risk: dawn of class action suits
Liability of directors: D&O policy
Disclosure requirements Vs confidentiality for competitiveness
Real time disclosures: how much and when and to whom
Exception report: Is acknowledgement deemed acceptance
Insider trading regulations: knowledge of price sensitive information
Joint venture agreements
Exercise of affirmative rights
Quorum requirements for Board and shareholder meetings
Restrictions on transfer of shares in public companies
Put and call options at pre determined formula
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Thank you!