Corporate Governance

and Capital Markets

T. V. Mohandas Pai
Member of the Board and CFO
Infosys Technologies Limited
Corporate Governance and Capital Markets

Source: A McKinsey Survey of Global Investors

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What went wrong in the recent past?

» Environment
» Loss of moral fibre of corporations
» Business environment characterized by need to compete with the new
economy
» Boards
» Fundamental weaknesses in business models sought to be compensated
by adoption of aggressive accounting practices
» Ignored ethics and value systems when a much hyped business strategy
failed to deliver as expected and articulated to Wall Street
» Incompetence of board members and overriding of audit committees
» Managements
» Stock option heavy compensation structures
» Bonus linked to short-term revenue growth, EPS and stock price
» An inability to accept failure
» Excessive focus on beating the street

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What went wrong in the recent past ?
» Auditors
» Aggressive interpretation of accounting standards
» Independence compromised to obtain lucrative consulting assignments
» Employees
» Compensation linked to stock-price movement
» Large disparity between the highest and lowest paid employee
» Culture of greed promoted within the organization by management
» Manipulative accounting practices
» Analysts
» Ever-greening of reports with an eye on investment banking assignments
» Pressurized managements to beat quarterly estimates
» Investors
» Short term focus of investors

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Global Reactions
» Regulatory reactions
» SOX
» NYSE/NASDAQ Rules
» Clause 49 of listing agreement in India
» Corporate reactions
» Focus on fundamentals of business models
» Focus on strengthening internal controls and information systems
» Stock options
» Enhanced disclosures in MD&A and Annual Reports
» Guidance
» Focus on critical accounting policies
» Aggressive journalism
» Accounting/Governance was the main story for months
» Glorification of the whistleblower
» Time Magazine’s Person of the Year

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Key Themes of Current Reforms
» Independent directors and audit committees have enlarged responsibilities
» Stricter independence standards for audit committees
» Enhanced role of the whistle blower
» Board effectiveness and integrity targeted by regulators, politicians and
the media
» Compensation structures are under attack
» New level of discipline brought to SEC reporting and under Clause 49
» CEO/CFO certifications
» Improvement in processes as effectiveness of internal controls need to be
certified
» Improved processes and controls have connected the board to the day to day
functioning of the company
» Real time disclosure and shortened deadlines
» Auditor independence
» Repeal of self regulation for the auditing profession
» Analyzing the analysts

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Corporate Governance and Capital Markets

» Investment is an act of faith

» Poor governance
» Undermines integrity of corporations and discourages the use of public
markets as a means to intermediate savings
» Particularly the areas of transparency and disclosure have been a major
factor behind instability in the financial markets across the globe
» Good corporate governance
» Essential pre-requisite for the integrity and credibility of capital market
players
» Contributes to the development of a vibrant economy and robust capital
markets
» Recent events have repeatedly proven the importance of corporate
governance standards, including the collapse of large global
corporations

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What is the Current Status on Corporate Governance
Practices?
» Insistence on forms and structures
» Overarching regulations and regulatory overkill
» Inadequate number of strong independent directors
» Large liabilities for corporations and officers
» Has the pendulum swung too far?
» For the first time in the decade-long history of the Index of Economic
Freedom, the United States is no longer among the Top 10 “Most
Free Countries”
» Wall Street Journal and the Heritage Foundation “Index of Economic
Freedom”
» India is not even in the list of Top 10

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What is the Current Status on Corporate Governance Practices?

Greater emphasis on leadership

by example

Boards are returning to basic

value systems
• Each culture should look back to
its roots for value systems
• India’s centuries old principles of
“Dharma” Strengthening
the moral fiber
of the
Value systems are helping corporation
build corporate governance
framework for companies

Boards are redefining value

creation
• Not merely increase in stock
prices

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Strengthening capital markets through corporate
governance
» Improving the tone at the top
» Code of ethics - Not an annual exercise….talk about and
demonstrate the company's ethical standards again and again
» Get colleagues, business heads to speak about core values
» Make ethics part of the company’s DNA
» When someone does commit an ethical violation, a company should
move to fix the problem and remedy the harm as quickly as possible.
» It also has to take appropriate action against the offending employee -
swiftly and firmly, even if the offending employee is a star performer
» Hold all of your managers accountable for setting the right tone.
» That means disciplining or even firing them when they have failed to
create a culture of compliance
» CXOs themselves have to comply with the letter and the spirit of the
rules

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Strengthening capital markets through corporate
governance

» Make character a part of the set of key hiring criteria

» Make integrity, ethics and compliance part of the
promotion, compensation and evaluation processes as
well
» Listen to employees… including the bad news
» Deliver the message of integrity, honesty and truthfulness
to those with whom you do business
» Make it clear that you won't tolerate compliance risks -
even if that means losing a lucrative piece of business or
a client or a transaction

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Thank You