Corporate Governance: Tool for Competitiveness CA Ramesh Chandak MD & CEO, KEC International Limited

Corporate Governance (CG)- A difficult subject today In todays environment with the collapse of Lehman Bros., AIG difficult to speak on CG These companies practised CG in compliance with Sarbanes Oxley and requirements of the NYSE & NASDAQ Yet they went down the dumps Until the time the tide is high, difficult to identify who is complying with CG Only when the tide goes low, one who is swimming naked is exposed Overnight the love affair with the stock market ended 2

Global Business Environment & CG The world today has become flat The dynamism of the business environment has ensured that business is done to Expand operations globally Attract capital globally Competitiveness has become very critical not just for growth but for survival itself In current turmoil maximization of available resources is critical: men, money, machines, market, etc. Globalization has made CG an important framework condition affecting business competitiveness 3

CG - Need for Overall Competitiveness Corporate Governance now being increasingly considered by: The ability to demonstrate corporate governance has become a requirement for growth and reduction of cost of capital 4 VCs & FIIs Bankers Multi-lateral Agencies Employees Society Media Research Analysts Vendors/ Contractors

CG- Widely Covered Topic Many legislations Sarbanes Oxley NYSE/NASDAQ Rules Clause 49 of listing agreement in India Surveys Literature Articles by various experts Numerous definitions of CG Theoretically, these have put CG in black and white 5

No Black and White only GREY Reasons: We are never even near perfect situation which is difficult to define Vary from place to place, country to country – highly subjective Regime of bribes Govt. interference High tax rate Cash economy Cultural difference Tax evasion Political influence Corporate Governance Grey Areas 6

CG – A subjective concept in practice Before the crisis, stocks were booming even under veil of secrecy Investors from USA and other places were investing funds despite the view that things were not always done in a most transparent and professional manner Acceptance of this behavior by investors was justified on the ground that things are done differently here Investors were making good returns on their investments, albeit with high risk In greed, companies ignore CG An opportunistic view of CG is taken by them 7

CG – A subjective concept in practice Accounting professionals would have witnessed and evaluated CG practices in companies like Lehman Bros., AIG Evaluation was too theoretical They never thought that this could happen to them The current turmoil wasnt sudden, there were signals but we ignored them Failure of these companies has made evaluation of CG very challenging A matter of high subjectivity Will have to move from compliance to in-depth evaluation 8

CG – Definition – Theory Vs Practice World Bank Definition: about promoting corporate fairness, transparency and accountability In practice, CG goes beyond and looks into the implicit and explicit relationships of the company with all stakeholders One of the key elements of improving economic efficiency and competitiveness is through effective corporate governance practices 9

Effective CG Practice No single model of good CG practice; it is more than transparency Regulation alone can not ensure good governance Discipline and Self Assessment –very important 10 SMART SimpleMoralAccountableResponsive Transparent

CG- Issues Owner-driven Companies Independent Directors Empowering Employees Business Restructuring Regulatory Environment 11

CG – A matter of Perception Many times perception of CG define the preference of a company All companies comply with requirements of CG as per the regulations But we have our perceptions of which one is better 12 HDFC BankICICI BankLICKotak LifeAirtelBSNLInfosysSatyam

Performance with Governance 13 Low Premium Outstanding Disaster Good BadGood P E R F O R M A N C E

Lift the veil of secrecy for true spirit 14

In Conclusion Clause 49 and Sarbanes Oxley are sacrosanct But these need to be supplemented by following CG in spirit by inculcating self-discipline and integrity in the DNA of the company Companies which practice CG both in letter and spirit and do not take only opportunistic view will attract Capital at lower costLower lending rates Better vendor networkWider global reach Respect from the society This will increase competitiveness Better profitability Higher market share CG – important in todays flat world to survive, grow and make profits 15

Thank You