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PAPER PRESENTED BY SATISH MENON FOR DISCUSSION AT THE 33rd NATIONAL CONVENTION OF COMPANY SECRETARIES – INDIA - CHENNAI – OCTOBER

20 -22 ,2005
ACHIEVING GLOBAL EXCELLENCE IN CORPORATE GOVERNANCE: AN EMERGING PARADIGM IN AN EXTREMELY COMPETITIVE ENVIRONMENT I. INTRODUCTION

Against the backdrop of globalization and liberalization of the Indian businesses as well as the emergence of an extremely competitive environment, the concept of Corporate Governance, today goes far beyond mere Board Practices and extends to Ethics Controllership, Compliance, Risk and Exposure Management Systems. This Paper, which attempts an Out of the Box Thinking in the Emerging Paradigm of Achieving Global Excellence in meeting Corporate Governance Norms both in form as well as in substance, also facilitates the successful pursuit of a Change Management initiative in the achievement of Excellence in Corporate Governance by an organization, through several value creating strategies and initiatives, so to Strategically and Innovatively Create Value, not only for the organization but also for each one of its stakeholders. II. WHAT DOES ONE MEAN BY “EXCELLENCE”?

In the words of Mr. Azim Premji, the Chairman of Wipro Limited; “Excellence is going a little beyond: beyond what is expected from others and beyond what we expect from ourselves.” Mr. N. R. Narayana Murthy, the Chairman of Infosys Technology Limited professes that; “Excellence is not just a product or a process. It is an attitude that says Nothing Else Would Do.” Sir. Joshua Reynolds, the English Artist says that: “Excellence is never granted to man but as the reward of labor. It argues no small strength of mind to persevere in the habits of industry without the pleasure of perceiving those advances, which, like the hands of a clock, whilst they make hourly approaches to their point, proceed so slowly as to escape observation.” Excellence therefore, is undoubtedly never the result of a “Chance” but always a conscious exercise of a “Choice ” .

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III.

THE BUSINESS AND ECONOMIC ENVIRONMENT

The globalization, dynamism and the uncertainties of the Indian businesses have made it extremely difficult and unviable for organizations to pursue their objectives in the manner, in which, they were traditionally known to operate. Business organizations now have very little option but to adopt strategies and initiatives that meet world class standards in their endeavor to enhance competitive advantages, reduce costs, improve quality, mitigate legal and contractual risks and thereby enabling the most optimum use of their available resources. With the increasing use of Information Technology globally, coupled with the advent of the Internet, one has witnessed an upward trend towards revolutionizing the way businesses operate, with organizations searching for ways and means to reinvent themselves with proactive strategies and initiatives, so as to survive in an extremely competitive environment. The stringent provisions of the Sarbanes Oxley Act in the USA and the Securities and Exchange Board of India Act in India and in particular the periodic certification by the CEO/CFO of Listed Organizations envisaged therein, coupled with the accountability and listing standards stipulated by the Stock Exchanges globally and in particular the onerous responsibilities, duties and obligations cast upon the Audit Committee, have brought the importance and necessity of Exemplary Corporate Behavior into a sharp and significant focus. Exemplary Corporate Behavior is always evidenced by not only the successful pursuit of the highest Global Standards of Good Corporate Governance, Ethical and Controllership Practices but also a near total compliance with all the applicable laws of the land and contractual obligations applicable to the business so as to minimize and mitigate risks and exposures, both legal and contractual, on a regular and a consistent basis. The ideal approach in this regard would, therefore, be to view the entire endeavor as a process discipline. It has therefore, become imminent for business organizations, particularly those operating in an extremely competitive environment, to put in place appropriate processes, systems and procedures, to not only successfully implement the highest Global Standards of Good Corporate Governance and Ethical and Controllership Practices but also a robust and a well structured Compliance, Risk and Exposure Management Systems. IV. VALUE CREATING STRATEGIES AND INITIATIVES

Against this scenario, let us now look at a few value creating strategies and initiatives, meeting global standards of excellence, which could be considered for implementation by an organization operating globally, in an extremely competitive environment, so as to Strategically and Innovatively Create Value not only for the organization, but also for each one of its stakeholders. Achieving Global Excellence in Corporate Governance Practices - October 18th 2005 Page 2 of 12

A.

Exemplary Corporate Governance Practices

Organizations are generally found to be complying with the corporate governance standards as mandated by regulatory agencies, most often in form, but seldom in spirit. However, organizations operating at exemplary levels almost always pursue Exemplary Corporate Governance Standards, which means that they comply with not only the regulatory obligations in letter but also in spirit as well, by making consistent and committed efforts which goes far beyond the call of the law. Pursuit of Exemplary Corporate Governance Practices by organizations, therefore envisages the formulation and implementation of structured systems and processes which meets the highest level of standards and these would, apart from complying with the normal regulatory obligations, would also include the following strategic initiatives; 1. Detailed Corporate Governance Guidelines for the board which involves documentation of the following; (a) (b) (c) (d) (e) (f) 2. Size, composition and constitution of the Board & Committees thereof Criteria and procedure for selection and appointment of Board members Tenure of appointment of Directors Criteria and procedure for reappointment of Directors Resignation, retirement and succession of Directors Policies for fixing of remuneration of Directors

Detailed Role Clarity and Responsibility Matrix for the Directors and in particular the following; (a) (b) (c) (d) Duties and Responsibilities of the Directors Expectations from the individual Directors Performance evaluation System of the Directors Internal Policies and Codes applicable to the Directors

3.

Detailed Business and Company Orientation of the Directors which involves inducting the Directors by sharing with them the following, on a periodical basis; (a) (b) (c) (d) (e) (f) (g) Vision, Mission and Long and Short Term Goals Brief note on the business and its objectives Organizational Structure and Key Management Annual Reports for the immediately preceding two years Memorandum and Articles of Association Customer and Supplier Profile Stock Option Plans

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4.

Detailed Role Clarity and Responsibility Matrix for Audit Committee and in particular, the following; (a) (b) (c) (d) (e) Written Charter Duties and responsibilities Scope and Schedule of Internal Audit Accounting Policies and Practices Details of Related Party Contracts

5.

Detailed Role Clarity and Responsibility Matrix for the Compensation and Benefit Committee and in particular, the following; (a) (b) (c) (d) (e) Written Charter Duties and responsibilities Key Result Areas of the Key Management Policies for fixing of remuneration of Key Management Performance Evaluation System for Key Management

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Detailed Director’s Statutory Obligation Guide which comprises of the following; (a) (b) (c) (d) Overview of statutory obligations of Directors Formats of all declarations and filings of/by Directors Registers & documents required to be signed by Directors Time Schedule for completion of various statutory obligations

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Detailed Guidelines for Directors and General Body Meetings and in particular, in respect of the following; (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) Schedule of the Meetings and Quorum thereat Attendance requirements at the Meetings Preparation and Circulation of Notices and Agendas Formats and Statutory contents of Meeting Folder Methodology for preparation and circulation of Meeting Folder Logistics for holding the Meetings and responsibility thereof Guidelines for invitation to others for attendance at Meetings Facilitating free, fair and meaningful discussions. Evaluating quality and effectiveness of meetings Recording and implementing board decisions Preparation, Circulation, Approval and Signing of Minutes Payment of sitting fees for attending Meetings Payment of periodic Directors remuneration Reimbursement of out of pocket expenses

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B.

Exemplary Corporate Ethical and Controllership Practices Integrity is difficult to define, but lack of integrity is not - Peter F. Drucker The most effective way to enhance Corporate Governance is through conscientious and forward looking action by the business community that focuses on generating long term stock holder value with the highest degree of Integrity. The Business Round Table’s “Principles of Corporate Governance”– May 2002 Competitive Advantage and Stakeholder Value in an organization can be generated as well as sustained only and only on the plank of “Integrity”, “Ethics” and “Controllership”. Pursuit of Exemplary Corporate Ethical and Controllership Practices therefore attains great significance and importance for an organization. Excellence in this important initiative envisages the formulation and implementation of the following structured systems and processes which meets the highest standards of Integrity, Ethics and Controllership;

1. 2. 3.

Code of Business Conduct and Ethics for Company as a whole Code of Conduct applicable to Directors and Senior Management Statutory Codes and Policies; (a) (b) (c) (d) (e) (f) (g) Insider Trading Code Corporate Disclosure Code Intellectual Property Policy Confidentiality Preservation Policy Electronic Resource Usage and Security Policy Risk Management Policy Sexual Harassment Policy

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Ethical Policies; (a) (b) (c) (d) (e) (f) (g) (h) Conflict of Interest Policy Business Relationships Policy Ethical Competition Policy Gift taking and receiving Policy Whistle Blowing Policy Employment Policy Equal Opportunities Policy Prohibition of Discrimination and Harassment Policy

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Controllership Policies and Manuals; (a) (b) (c) (d) Cheque and Document Signing Policy Employee Separation Policy Document Retention Policy Power of Attorney Policy

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Other Miscellaneous Policies; (a) (b) Press, Media and Advertisement Policy Environment, Health and Safety Policy

C.

Compliance Risk Management System When the business operations are spread over multiple locations, organizations are often in a great predicament as to how they can monitor compliance of all laws and regulations applicable to it in every location they operate. The endeavor becomes even more challenging when the organization has global operations as the complexities of the laws and regulations involved vary significantly from country to country. Compliance Risk Management System is therefore a very valuable tool which enables organizations in their pursuit of complying with all applicable laws and regulations at all locations as well as monitor, control, minimize and mitigate Compliance Risks. The process being a highly proactive one helps reduce the incidence of non compliance within an organization and also acts as an effective training tool to the operating teams.

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Compliance Risks are legal risks and financial exposures carried by an organization in the course of pursuit of its business objectives, resulting from a non compliance of either a legal or statutory obligation pursuant to: (a) (b) (c) All applicable laws and regulations requiring compliance All licenses and approvals obtained for pursuit of the business All internal policies, procedures and codes applicable to the organization.

2.

Compliance Risk Management is the systematic and structured methodology that can be pursued by an organization for identifying, monitoring, controlling and mitigating Compliance Risks and thereby enhancing the competitive advantages of the organization. This methodology enables the clear definition of “What If” situations and the risk mitigation strategies to proactively deal with any adverse impact arising out of the events identified during the “What If” exercise.

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3.

Compliance Risk Management System in an organization involves systematically taking the following steps with a view to bringing about process and cost effectiveness and efficiencies in the management of compliance risks and exposures and thereby enhancing the competitive advantages of the organization: (a) (b) (c) (d) (e) (f) (g) (h) (i) Inventorying all the Acts, Statutes, Licenses and Approvals Inventorying all the internal Policies Procedures and Codes Inventorying all the Compliance Activities and Obligations under above Risk Profiling each Obligation and assigning Risk Matrices Identifying owners for every Obligation and assigning responsibilities Empowering operational teams by appropriate training Firming plans for monitoring of compliance of each Obligation Monitoring compliance of each Obligation Pursuing risk/exposure mitigation strategies for all Obligations

D.

Contract Execution and Risk Management System The overall health of an organization is epitomized by the health of the contracts executed by it as well as its ability to successfully negotiate and document the precise understanding between the parties in clear and unambiguous terms which would leave no room for misinterpretation. Given the complex nature of structures often being pursued by the businesses today coupled with the multifarious issues and concerns which impact a transaction envisaged in a contract, a successful pursuit of the transaction today, undoubtedly calls for an in-depth and exhaustive understanding and appreciation of all the relevant legal, taxation, accounting, commercial and business issues. Once a contract is negotiated and executed, it is often found that the challenge for organizations actually just begins, particularly from the perspective of monitoring and mitigating risks of non – compliance of contractual obligations contained therein. Contract Execution and Risk Management System is therefore an endeavor to improve the effectiveness and efficiencies of contract negotiation and execution as well as for monitoring and mitigating risks and exposures associated with it.

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General Contract Counseling concerns with the provision of general and specific legal advice in connection with and pertaining to drafting, negotiating, finalizing and executing contracts and agreements (collectively “Contracts”) for the benefit of the organization. These Contracts relate to the following transactions pursued by the organization, (collectively the “Transactions”) ; (a) (b) (c) Mergers, Acquisitions, sale and purchase of shares and business Joint ventures and corporate restructuring General commercial business associations

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2.

Value Added Contract Counseling concerns with the provision of the following value added legal services for the benefit of an organization in relation to Contracts each of which would help, support and facilitate such an organization to pursue the Transaction most effectively and efficiently by: (a) (b) (c) (d) Identifying and evaluating the impacting top level taxation, accounting, commercial and business issues of concern Identifying and inventorying all obligations under executed contracts to enable monitoring of compliance thereof Identifying and evaluating legal and contractual risks and exposures under executed Contracts Pursuing risk mitigation strategies in connection with executed Contracts.

3.

Contract Execution Management is the systematic and structured methodology that can be pursued by an organization in relation to obtaining of both General Contract Counseling and Value Added Contract Counseling for the benefit of the organization. Contract Risks are contractual risks and financial exposures carried by an organization in the course of pursuit of its business objectives, resulting from a non compliance of any contractual obligation with any third party. Contract Risk Management is the systematic and structured methodology that can be pursued by an organization for identifying, monitoring, controlling and mitigating Contract Risks and thereby enhancing the competitive advantages of the organization. Contract Execution and Risk Management System in an organization involves systematically taking the following steps in relation to Contracts in an organization, with a view to bringing about process and quality effectiveness and efficiencies in the management of these Contracts and thereby enhancing the competitive advantages of the organization. (a) (b) (c) (d) (e) (f) (g) (h) (i) All general and specific legal issues All general taxation, accounting, commercial and business issues Standardization of Contract for a Transaction Risk Profiling all clauses in a standard contract Assigning Risk Matrices to all clauses in a standard contract Evolving alternative negotiating strategies for every contract Evolving process for negotiating, finalizing & executing contract Monitoring compliance of obligations under executed contract Pursuing risk & exposure mitigation strategies for all contracts

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E.

Legal Process Management System Poor legal processes and procedures undoubtedly result in errors, rework, delays, and thereby makes the costs for completing a legal transaction very expensive. Improvement in legal processes therefore translates into a cutting edge strategy for the winners. Implementation of a Legal Process Management System which brings about legal process transformation within the organization, is therefore the first step towards achieving operational excellence within an organization particularly from the perspective of legal processes.

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Legal processes are the general processes and procedures followed by an organization in the course of pursuit of various corporate transactions. These general processes and procedures are in fact the actual work flow generally followed by an organization to accomplish the various individual tasks that form part of every corporate transaction. Legal Process Management concerns with the systematic and structured endeavor to accomplish the various individual tasks that are required to be pursued by an organization in the course of successful completion of the various corporate transactions .Legal Process Management encompasses reengineering of the various legal processes including by way of preparation of Standard Operating Procedures (SOPs). Legal Process Management System in an organization involves systematically taking the following steps with a view to bringing about process, quality and cost effectiveness and efficiencies and managing risks and exposures, including by eliminating duplications and rework and thereby enhancing the competitive advantages of the organization. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Inventorying & categorizing and prioritizing Transactions Inventorying individual tasks in Transactions Ascertaining current work flow in respect of individual tasks Identifying pain areas and inefficiencies under each tasks Reengineer the processes, work flows and sequence of events Document each of the revised processes and procedure in SOPs Identifying owners for each SOPs Empowering operational teams through adequate training Firming plans for reviewing and updating SOPs Monitoring compliance under each SOPs Pursuing risk & exposure mitigation strategies under each SOPs

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3.

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F.

Legal Knowledge Management System The Legal profession is indeed, a very information intensive profession and the success of legal professionals depends significantly upon the accessibility of vast amount of complex legal data and information in connection with their work. This data and information has a recognized value because it holds experience and expertise learnt by the team over a long period of time. The preservation and transfer of this knowledge existing within an organization, seldom occurs in a systematic manner. This often results in a substantial waste of time. Legal Knowledge System is therefore an endeavor to ensuring consistent availability of informative data on an updated basis for decision making as well as for capturing learning from daily transactions for future use so as to eliminate reinvention as well as duplication of efforts within the organization and thereby minimizing overall costs of operation.

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Legal Knowledge comprises of collectively the following information pertaining to an organization which is either required or generated or used by an organization in the course of pursuit of its day to day business and which has a recognized value because it holds experience and expertise learnt by the team over a long period of time; (a) (b) (c) (d) Laws, statutes, regulations and amendments thereof Latest relevant judicial pronouncements Learning after every transaction. Precedents in the organization

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Legal Knowledge Management involves the implementation of a systematic and structured processes for acquiring, capturing, updating, storing, maintaining and retrieving knowledge of not only legal data but all other data which would have an implication arising out of a statutory or contractual obligation in an organization, including the experience and learning of the individual team members in the course of their day to day work. Legal Knowledge Management System in an organization involves systematically taking the following steps with a view to capturing learning from daily transactions and bringing about a consistent availability of informative data on an updated basis for decision making and thereby enhancing the competitive advantages of the organization.

3.

(a) Syndicating latest laws, statutes, regulations and amendments (b) Identifying and analyzing of the latest relevant judicial pronouncements (c) Periodic circulation of the above captured information. (d) Preparation of a detailed summary of learning after every transaction. (e) Maintaining a data bank of these learning and precedents for future use (f) Periodic internal circulation of a Legal Bulletin Achieving Global Excellence in Corporate Governance Practices - October 18th 2005 Page 10 of 12

G.

Legal Environment Management System While evaluating business strategies for implementation within an organization, managements often come across legal and economic hurdles which often results in the environment playing the role of being “ Spoil Sports ”. Again, while implementing business decisions, it is not unusual to come across instances when organizations meeting with legal and economic road blocks resulting in significant delays in the implementation of these decisions. Legal Environment Management is therefore a proactive endeavor which could undoubtedly enable organizations to meet with its emerging challenges in a much more effective and efficient manner.

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Legal Environment comprises of collectively the following internal and external factors which , directly or indirectly or adversely or favorably, impact the organization and its business ; (a) (b) (c) (d) (e) Laws, statutes, regulations and amendments thereof Latest relevant judicial pronouncements Economical or financial policies of the Government Vision , Mission and Long and Short Term Goals Mergers, Acquisitions, Joint Ventures and other Corporate Restructuring

2.

Legal Environment Management concerns with the systematic and structured endeavor to effectively and efficiently manage the Legal Environment in which an organization operates, in such a manner so as to enable a proactive identification, analysis and elimination of any treats, surprises or road blocks arising out of the Legal Environment in the pursuit of the business objectives of the organization. Environment Management System in an organization involves systematically taking the following steps with a view to eliminating any treats, surprises or road blocks arising out of the Legal Environment in the pursuit of the business objectives of the organization and thereby enhancing the competitive advantages of the organization. (a) (b) (c) (d) (e) (f) (g) Inventorying all laws, statutes and regulations applicable to the business Identifying all latest judicial pronouncements applicable to the business Identifying all economical or financial policies of the Government Analyzing each of the above with particular reference to the organization Identification of Legal threats to the organization and its business Pursuit of appropriate de-risking strategies for damage control Successfully lobbying for changes through representations

3.

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V.

CONCLUDING THOUGHT

The importance of this Paper would be evident from the following quote by Mr. Ira .M. Millstein from page 10 of Money and Business Section of the New York Times, April 6, 1997. Mr. Millstein, an authority on Corporate Governance, and who was also the co chairman of the Blue Ribbon Committee. “Darwin learned that in a competitive environment an organism’s chance of survival and reproduction is not simply a matter of chance. If one organism has even a tiny edge over the others, the advantage becomes amplified over time. In ‘The Origin of the Species, ‘Darwin noted, ‘A grain in the balance will determine which individual shall live and which shall die.” Each of the above value creating strategies and initiatives are “grains in the balance” which if implemented by an organization would, individually and collectively, provide the organization the “tiny edges” over the others and in a competitive environment the advantages of such tiny edges would become amplified over time and such advantages would undoubtedly add value to itself as well as its Stakeholders. -----------x-------------x-------------x----------------

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