A survey of 200 fund managers across seven continents organised by McKinsey sometime in 2003 revealed that the equity of well-governed companies commanded a premium, which varied from jurisdiction to jurisdiction and ranged from 11 per cent (Canada) to 44 per cent (Morocco).
It was 23 per cent in the case of India. Another piece of research by CLSA brought out the point that top-quartile corporate governance stocks outperformed in seven of the 10 markets surveyed, over a five-year period, by 35 percentage points.
The CLSA corporate governance report of 2001, titled "Saints and Sinners", establishes a strong correlation between good corporate governance, on the one hand, and high returns on equity (RoE) and economic value addition, on the other. The converse is true when it comes to poor corporate governance. These findings validate the belief that good corporate governance augments monetary (in addition to ethical) value.
Separating ownership from control was one of the most significant developments of the 16th century, and this spearheaded inventions, experimentation, and economic prosperity.
In our own times, major misconduct across the Atlantic and in Europe arising out of directorial ignorance, strategic ineptitude and infelicitous greed (a la Alan Greenspan) shook investors' confidence.
The stakeholders' resulting disgust validated Lord Thurlow's maxim: "Corporations have neither the bodies to be punished nor souls to be condemned; they therefore do as they like."
The trail of events led to sharp, albeit knee-jerk, reactions aimed at enhancing the quality of corporate governance. Numerous committees have been constituted [including one the author chaired--the International Organization of Securities Commission's (IOSCO's) task force on corporate governance] and many codes have been notified. The focus of most initiatives has been on the form of compliance rather than the substance.
The new inventiveness in improving the quality of corporate governance places substantial emphasis on the composition of the board and its significantly enhanced obligations, particularly the independent directors. Penalties for non-compliance are severe. This has invoked multi-dimensional responses.
On the one hand, it has sharpened the search for independent directors of eminence and with skills, and focused on conflicts of interest, the formation of board committees, the quality of board procedures, directors' compensation, and liability insurance--all regulatory imperatives.
On the other hand, reticence is rising on taking up the positions of independent directors. The tremendous response to the recently launched web-site, in collaboration with the National and Bombay Stock Exchanges, under the patronage of Sebi, for creating a data base for picking up independent directors may falsify this assessment.
The pleadings (unaware of the fact that I had since retired as chairman of Sebi) of one such eligible candidate (who described himself as Sebi-empanelled) on the sidelines of a seminar to recommend his name to some of the well-known companies which compensate independent directors well says it all.
The reticence among those with independent minds stems less from fear of facing the consequences of regulatory onslaught and more from the suspicion that their ornamental presence will be used merely for showing conformance rather than achieving the substance of good corporate governance.
Two high-profile scandals in the UK--Marconi and Equitable Life Assurance--have been adjudged by researchers to be cases not of fraud or corruption, but of strategic incompetence on the part of the board.
According to Bob Garratt, "The sale of any non-related businesses, the spending of the carefully garnered war chest, the plunge into massive debt, and an apparent strategy of bet-the-business on one industry--the highly fashionable telecommunications--was Marconi's primrose path to everlasting corporate damnation."
In the case of Equitable Life Assurance, the draconian decision of the board to guarantee the future pension levels of one group of investors at the cost of others led to doomsday.
It is increasingly believed that the board did not discharge its fiduciary (holding the entity in trust for the future) responsibility through meticulous and scrupulous reviews, risk assessments, and sound judgments. Even in the case of Enron, the board did not critically question the balance between the penchant for strategic entrepreneurial drive and the prudence of risk management and control mechanisms.
A Crisil study of 50 listed Indian companies highlights the fact that most of them have concentrated shareholding and, in the case of 48 per cent of them, the largest shareholder owns 50 per cent of the equity capital. Except ICICI Bank and HDFC Bank, all Indian companies have a promoter holding of over 15 per cent.
If we transpose the revelation of premium on the equity of well-governed companies to the holding pattern, it makes even revenue sense for the controlling shareholders (in both the private and public sectors) to improve the quality of corporate governance. The boards, mostly comprising wise men and women, can be effectively leveraged if the mandate moves from mere conformance to performance.
Managing and directing are two diverse sets of roles and they warrant singular skills. Whereas it is easily possible for good managers to learn the art of directing, it entails quite a bit of unlearning as well. Breeding a sense of actualisation can help motivate even the elitist on the board of directors to learn and unlearn, even at the fag end of an illustrious and acclaimed life's journey.
Utilising the board's talents to create value is often prevented by lapses in decision-making processes. Stereotypical vision, superfluous assessment, imperviousness, collective rationalisation of (deficient) approaches, the illusion of unanimity, and unquestioned belief in the morality of colleagues on the board--these are some of the things I have experienced by being on the boards of some prominent listed companies and during my tenure as a regulator.
Through balancing the pull between business effectiveness and business efficaciousness, a board can build sustainable success.
The primary responsibilities of the board must be two: strategy and performance monitoring. The efficacy of strategy and company efficiency culminate in stakeholder value, via financial performance.
Strategy ought to focus on differentiation and economic costs and trends, and average equity spread and the growth of markets over time. Performance monitoring should lay emphasis on resources utilisation, financial performance and perspective alignment, culminating in equity cash flow and return on equity.
Submissiveness may be a virtue, but a pragmatic assertion of the board can add durable value--which is a greater virtue. New settings unfold unique sets of challenges in ensuring that a company's assets are managed proficiently, prudently, and honestly.
What will eventually differentiate a company will be its capacity for wealth creation, the dexterity of wealth management, and the efficacy of wealth sharing.
The author is former chairman, Sebi, and former chairman, LIC.
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