Corporate Governance and Discipline Not only a higher standard of corporate governance contributes to economic advancement, the failure to maintain standards brings in major shocks to the economy. Recent corporate scandals, such as Enron and World.com have rocked the global financial markets and shaken the confidence of investors. The authorities and the regulators all over the World are burning midnight’s oil to prevent recurrence of such scandals. Though efforts are being made to instill good governance practices and rebuild confidence, it is easier said than done. What is needed a stitch in time saves nine. This is possible, only if the corporate management is disciplined. If they are not so on their own, they need to be coerced by the state. The systems should be in place to avoid corporate misconduct and ensure discipline. What instill discipline are the corporate governance institutions comprising both formal and informal rules (the latter notably include a country’s generally accepted business practices and ethical standards, though these are normally unwritten) that are established among private actors as well as by the state or other public authorities. Some of the key institutions and actors are corporate law, securities laws, securities regulations, listing requirements, judicial system, professional associations, business associations, financial accounting standards, stock tendering requirements, proscription of self-dealing, public disclosure, auditing standards, etc. These institutions and actors impose three kinds of disciplines on the corporates: · Self Discipline · Market Discipline · Regulatory Discipline Good corporate governance requires all three disciplines to ensure required the checks and balances. The first and foremost persons responsible for the quality of a company are its management and controlling shareholders. They set the standards of ethics and performance that the company is judged by. They must exercise self-discipline. This works when the controlling shareholders or management are highly ethical and treat minority shareholders fairly. The system breaks down when the internal checks and balances, such as independent board committees, internal and external audits, and the transparency of disclosure do not function well. Where self discipline alone does not work, market enforces discipline on the management. The fear of losing in the market place forces management to behave responsibly. Companies, when protected from competition, may develop cartels or monopolistic tendencies that do not treat consumers or investors fairly. This may be a deterrent for development of securities markets When self and market discipline fails to regulate the conduct of corporate in the best interest of all the stakeholders, we need regulatory discipline. Regulators set the rules of the game in consultation with the private sector, and enforce these agreed rules, fairly and transparently. They must also protect investors through greater public education and disclosure rules. When cheating or fraud occurs, there must be the discipline to take necessary enforcement action. Governance and Value Creation Ratings I believe that while a lot has been done in the filed of corporate governance, we need to advance it to the centre-stage of corporate operations. Otherwise, it would remain as an ineffective side agenda, which will get a lot of lip-service but would never be used as the important tool in improving corporate behavior. In order to bring it to centre stage, we must have an unambiguous yardstick which can be used to measure and monitor the progress on the path of corporate governance. Indian market has developed a yardstick in the form of ‘Governance and Value Creation Rating (GVC)’ architectured by CRISIL, a leading credit rating agency in India and one of the four largest agencies in the world. This is significantly different from the ‘Traditional Corporate Governance Rating (TCG)’, which is available in several regulatory jurisdictions. The GVC approach stems from the belief that good governance, over and beyond its process aspects, is fundamentally a sustainability issue - good governance should result in the creation and fair distribution of tangible benefits. It is based on the following premises: Ò The strength of stakeholder relationships can add to/impede future wealth creation by the corporation Ò Governance processes must be such that wealth created is evenly distributed across all classes of stakeholders. Ò Management quality must be such that it is able to adapt the above two to match the dynamics of the business environment Ò All these impact stability of future wealth creation While the corporate governance is expected to enhance the interests and fulfill the aspirations of all stakeholders, it does not necessarily happen always. While the ultimate purpose of all corporations is to create wealth for its shareholders, it is important to recognize that shareholders are indeed the residual stakeholders. The obligations towards the contractual stakeholders such as customers, employees, vendors, creditors and the society get precedence over the interests of the shareholders. The contribution of other stakeholders to the success of the corporation is not less important than that of the shareholders. Unless the company blends a harmonious relationship among all the stakeholders, it may jeopardise its ability to create wealth on a sustained basis. The GVC rating seeks to capture this sentiment. - The assessment evaluates how governannce processes are conducive to these factors and the true spirits at work. - Wealth Creation: This is assessed in detail for each kind of the stakeholder. The finances of the company are assessed with a view to understanding the level of wealth creation (inputs minus outputs), particularly with reference to macro- economic environment and micro industry environment and if the wealth has been created in a manner beneficial to all stakeholders. A methodology similar to Economic Value Addition (EVA) is used for this. - Wealth Management: This is assessed aacross the stakeholders. The wealth generated from management of inputs and the functioning of the organisation has to be managed well. The wealth must at all times remain on multiplier matrix so that it grows optimally. Even if the wealth is being utilised for purposes other than the core businesses and activities of the company, it should be for the ultimate good of all the stakeholders in the medium and long term. - Wealth Sharing: Similarly, GVC assessses if the wealth is being shared proportionately i.e. those who are entitled for contractual sharing get their dues and in time. Further, residual is shared amongst various classes of shareholders proportionately and equitably. There is no disproportionate sharing in particular through instruments like ESOP, Sweat Equity disproportionate compensation etc. Conclusion I strongly believe that an efficient securities market and a high standard of corporate governance can do wonders to developing, emerging and transition economies. As a regulator, SEBI is trying to ensure both in India so that Indian economy can rub shoulders with the most developed countries. With this aim, we have successfully reformed corporate governance practices and securities market in the last decade so much so that we are models in these respects for many, including the developed markets. Our endeavour has paid well in the sense that no major scandal involving corporate governance has taken place in India so far. It did not contract any contagion effect of the overseas corporate governance scandals, even though the Indian economy is substantially integrated with the global order, a number of transnational corporations operate in India and quite a few large Indian firms are listed on various overseas stock exchanges. Raising the quality of corporate governance is a challenge that involves all the market participants – issuers, directors, regulators, policy-makers, auditors, advisors, educators and investors. We all have to work together to make this work. Good corporate governance is not just a matter of pre-scribing particular corporate structures and complying with a number of hard and fast rules. There is a need for broad principles. All concerned should then apply these flexibly and with common sense to the varying circumstances of individual companies. Ethical behavior isn’t an output of codes of ethics or codes of conduct, it’s a human activity shaped on a daily basis by the existing organizational social framework. It is absolutely imperative that a corporate governance ethic emerges and envelops all market participants: issuers, auditors, rating agencies, directors, underwriters, and exchanges. Its foundation must be an unwavering commitment to integrity. Its cornerstone – an undying commitment to serve the investor. The corporates have to adhere to the Triumvirate of Indian values: SATYAM (Truth), which is the ethical component of business ??SHIVAM (Welfare), which should be the economic objective of business ??SUNDARAM ( Beauty), which should be aesthetical outlook for business ) (Aesthetics does not imply physical beauty but purity of ideas, morality in behavior) I have tried to examine the reasons why corporate governance has become a significant issue in recent times and the different types of corporate governance and the relationship between corporate governance and development . In the ultimate analysis we examine how to translate the concept of corporate governance into reality or turn rhetoric into reality, we find the most important aspect is the commitment of the management to observe the highest values. GCGF has to play a crucial and important role in ensuring that governments and corporates follow ethical governance practices . This is necessary for the development of this planet. We have all gathered here to find out ways to ensure good governance. Ultimately there is no alternative but to put our heads together and learn to practice the lessons of one of the ancient and sacred texts of India : the Taitreya Upanishad. Sahanavavathu sahanau bhunaktu saha viryam kara va vahai Tejasvinam aditamastu ma vid visha vahai om shanti shanti shantihi Let us come together, let us enjoy together, let our strengths come together, let us move from darkness to light, let us avoid the poison of misunderstanding or hatred, that way lies progress.