Corporate governance Performance and Measurement

T.V.Mohandas Pai Member of the Board and CFO Infosys Technologies Limited

Corporate Governance
A system of checks and balances between the board, management and investors to produce an efficiently functioning corporation, ideally geared to produce long-term value  The Conference Board

Issues in Corporate Governance

     

Asymmetry of power Asymmetry of information Interests of shareholders as residual owners Role of owner management Theory of separation of powers Division of corporate pie among stakeholders

Current status on corporate governance

      

Insistence on forms and structures Overarching regulations Regulatory overkill Lack of adequate number of strong, independent directors Large liabilities for companies and officers Has the pendulum swung too far? For the first time in the decade-long history of the Index of Economic Freedom, the U.S. is no longer among the top ten most free countries Wall Street Journal and the Heritage Foundation Index of Economic Freedom

Current status on corporate governance

Comparison of Board structure Indian top 50 Vs U.S. top 50 Key Findings
Parameter Ownership pattern Board size India (Nifty Fifty companies) 48% of Indian companies have largest shareholder holding over 50%
Largest 44%

US (top 50 out of NYSE 100 index) Largest shareholder holds less than 10% in all cases
Largest

board size 17. smallest 5

board size 18. smallest 10

of the top 50 companies have more than 12 directors of companies have a board majority of independent directors

66% of the top 50 companies have more than 12 directors All companies have a board majority of independent directors

Board independence

58%

12%

have less than 1/3rd of their directors independent Boards of 49 companies out of 50 have less than 25% executive directors Only 20% have separate Chairman and CEO 20 companies have lead independent directors
All companies have fully independent audit remuneration and nomination committees

Executive directors in board Chairman and CEO Lead independent director Board committees

In 35 companies 50% of the directors or more are executive directors 60% have separate Chairman and CEO 3 companies have lead independent directors
All

companies have audit committees 54% have fully independent Audit Committees companies have remuneration committees of these 14 fully independent and 16 have majority independent committees companies have nomination committees 6 are fully independent and 3 have majority independent committees

33

9

Source: Crisil Report on Corporate Governance

Governance and performance

    

Good governance leads to good performance It creates an open and transparent system It improves communication and breaks down systematic barriers to flow of information Good governance allows decision making based on data. It reduces risk Good governance helps in creating a brand and creates comfort for all stakeholders and society

Does performance depend on governance

 

Short term performance does not necessarily depend on governance Market asymmetries are responsible for this. However, this increases risk. This also creates barrier to long term growth We all know what happened to Enron?

Does performance depend on governance

 

 

Medium to long term performance requires governance Most companies which have grown in the last 25 years have outstanding performance and have good governance structure A good governance structure treats all stakeholders fairly Governance alone cannot ensure performance

Governance and Performance - issues

   

Is governance a luxury that can be afforded only by the performing companies? Do strategies and tactics need to change to accommodate governance with performance? Is there a time-lag between governance and performance? Are stakeholders concerned about performance or promised performance ?

Governance and Performance measurement - issues



Is governance behavior motivated by legislation? Do standards vary with jurisdictions or do you adopt the best option? Do you choose the right thing to do irrespective of whether its mandatory or not? Is performance evaluation limited to valuation metrics? Is it only ROE, Net margin, growth, shareholder wealth creation? Do performance measures need to be holistic? We need to encompass all stakeholders Governance is an enabler for holistic performance How do managers better understand governance requirements? Do we need market research for governance requirements?

Investing in Corporate Governance



Companies need to invest in good governance



Corporate governance has a direct bearing on business performance and thereby ROI Leverage the power of IT

On average, businesses with superior governance practices generate 20 percent greater profits than other companies


A study based on 256 companies conducted at the MIT Sloan School of Management

Thank You