ROLE OF INSTITUTIONAL INVESTORS IN ENFORCING CORPORATE GOVERNANCE IN FIRMS Yezdi Malegam Goa

PLAN Conceptual Base Corporate Governance in India Role of Institutional Investor

MAJOR IMPERATIVES Growing dissatisfaction with financial statements Growing dissatisfaction with boards Changing profile of the shareholder Birth of knowledge society Competition for larger share of international funds

MODELS ‘Outsider’ model – Anglo American ‘Insider’ model – European ‘Founding family’ model – East Asian

BASIC PRINCIPLES Accountability Transparency Equality of treatment for all stock-holders

KEY PLAYERS Management Board of Directors Shareholders

ATTRIBUTES OF BOARD MEMBERS Independent of management Minimum level of financial literacy Some members to have knowledge of the business Willing to devote necessary time and attention

MAJOR PROVISIONS OF THE CODE Composition of Board Formation of Committee Audit Investor Protection and Grievance Management Analysis and Discussion Other Disclosures Matters which the management must mandatorily place before board

OTHER MAJOR SEBI INITIATIVES Disclosure in Offer Document Unaudited quarterly financial statements Half yearly reviews of financial statements Accounting Standards Insider Trading Code Take-Over Code

DIFFICULTIES IN COMPLIANCE Applicable only to listed companies Enforcement through listing agreements Compliance in form but nor always in substance

DIFFICULTIES IN COMPLIANCE …2 Some common abuses Non-executive directors not really independent Inter-group advances / investments with related parties Investments in non-core assets

ROLE OF THE INSTITUTIONAL INVESTORS Do institutional investors need to get involved? What should be the nature of their involvement? How far have they been involved?

INVOLVEMENT OF THE INSTITUTIONAL INVESTORS - Pro Significant stakes in companies Can exercise significant influence on promoters and management and prevent abuses Better access to information and better monitoring capabilities Significant positive correlation between corporate governance and stock market performance

INVOLVEMENT OF THE INSTITUTIONAL INVESTORS – Pro …2 Research studies show countries and companies with weak corporate governance suffer larger collapses when hit by adverse shocks and are subject to greater volatility Major influence in attracting FDI

INVOLVEMENT OF THE INSTITUTIONAL INVESTORS – Con: Investment objectives and compensation system discourage participation Conflict of interest with primary fiduciary responsibility to own investors and beneficiaries Investors like MFs have short term performance measurement which works against active monitoring

NOMINEES ON BOARDS INEFFECTIVE Poor selection No formal reporting system Inadequately remunerated No clarity of role Unwilling to accept responsibility Generally averse to risk taking

ACTIVE ROLE SHOULD ENSURE Board members have adequate experience and are truly independent Executive remuneration, particularly for family members, is not excessive Early warning signals are detected from wealth of information made available to shareholders

ACTIVE ROLE SHOULD ENSURE …2 Companies funds are not diverted to non-core activities or for benefit of related parties Institutional investors lead shareholders in demanding corrective action where such action is warranted