INDIAN INSTITUTE OF TECHNOLOGY ROORKEE

Corporate Governance 2.0

BY GROUP-9

BMN-533 Strategy And Business Policy

Submitted To
Prof. Vinay Sharma
DoMS IIT Roorkee
GROUP MEMBERS
AKSHAT SHARMA (23810006)

ANKIT BARAL (23810009)

PRIYESH DIXIT (23810046)

RAHUL KUMAR (23810049)

SHIVAM MEENA (23810067)

KESHAV KANT (23810076)

BHAVESH MOTWANI (23810079)

P V RAMACHANDRA RAO (23810085)

 Presentation Overview

GOVERNANCE ISSUES PRINCIPLES

Hinderances in attaining best 3 core principles to reconceptualize
practices corporate governance

IMPLEMENTATION CONCLUSION
Steps to apply these principles Future challenges, considerations, and
and their Impact long-term vision
 Hinderances in Achieving Best Practices
SYSTEM
The system of regulation is
patchwork BUREAUCRA
CY
A mix of public and private
policy makers hinder
progress
HUGE DIVIDE
ISSUE
Shareholders and managers are
divided, there is a conflict of interest S
and Staked-out positions MEASUREME
NT
There is no defined metric for
SHRILL determining success in
governance
VOICES
A few loud voices
aggressively promoting their
own position
 THE PROBLEM
LACK OF
SHORT- SHAREHOLDE
LITIGATION TRANSPAREN
TERMISM R ACTIVISM
Threat of lawsuits
CY
discourages directors Shareholder activism
Pressure to prioritize Opaque methodologies
from taking bold prioritizes short-term
short-term and shady practices
decisions gains

Issues with
Corporate
Governance
 VARIOUS FACETS INVOLVED
SHORT-
TERMISM
Quarterly Earnings Focus
Investors value quarterly earnings
reports, leading companies to
sometimes sacrifice long-term
growth for short-term profits by
cutting R&D or maintenance.
Hedge Fund Activism
Hedge funds may push for short-
term stock price boosts, potentially
harming long-term prospects.
Example: Daniel Loeb pressured
Yahoo! to sell Alibaba stake,
impacting its future value.
SHAREHOLD LACK OF
TRANSPARE
LITIGATION ER
NCY
ACTIVISM
Lawsuits
Lawsuits filed by shareholders
alleging mismanagement, even
if ultimately unsuccessful, can
be costly and time-consuming
for companies to defend. This
can lead to a risk-averse culture
where directors avoid
innovative strategies for fear of
litigation. A 2019 study by
Stanford Law School found that
public companies are sued on
average 181 times per year,
with an average cost of $2.4
million per suit.
Proxy Wars
Activist investors utilize proxy
fights to contest board control,
prompting strategic changes
and diverting resources. In
2017, Carl Icahn's proxy battle
with DuPont led to its merger
with Dow Chemical. While
creating a larger entity, doubts
lingered about the merger's
long-term benefits, highlighting
the intricacies of activist
interventions.
Opaque Shareholder Voting
Proxy advisory firms such as ISS
and Glass Lewis hold significant
sway over shareholder votes, but
their opaque methodologies make
it hard for companies to address
concerns. A 2018 Harvard Law
School study showed that
companies receiving negative ISS
recommendations saw a 2.7%
average share price decline on
vote days.
Principle #1: Long-Term Management Focus

Current system is focused on short-term performance, pressured by quarterly earnings .

Companies go private to escape short-termism.

To allow long-term focus, Corporate Governance 2.0 proposes-

Ending earnings guidance to mitigate focus on short-term profitability.

Bringing back a staggered board with longer terms to provide stability and continuity.

Installing exclusive forum provisions to reduce frivolous lawsuits and encourage

long-term decisions
 Principle #2:
Boards Should Install Mechanisms to
Ensure the Best Possible People in the Boardroom

Boards have an obligation to ensure the
proper mix of skills and perspectives in
the boardroom.
PROBLEMS Boards don’t take a hard look at their
composition and whether the skill set on
the board reflects the needs of the
company.

Too often directors are allowed to continue

because it’s difficult to ask them to step down.

Age and Term Limits:

• Blunt instrument for achieving optimal board composition.
• A director’s contribution has little to do with either age or tenure. If anything, the correlation is likely to be positive.

For age limits, directors who have retired from full-time employment can devote themselves to their work on the
board. And as for term limits, directors will often need a decade to shape strategy and evaluate the success of its
execution; moreover, directors who have been in office longer than the current CEO are more likely to be able to
challenge him or her when necessary.
Require Meaningful Director Evaluation:
• An independent third party to design a process
and then conduct the evaluation.
• Grading directors on various company-specific
attributes.
• Involvement of Chairman/Lead Director.
• More subtle effects on board composition and
boardroom dynamics.
if JPM’s risk committee had directors
with risk expertise, London Whale
incident would have been prevented.
Only in the aftermath of the debacle
did the board add a director with risk
expertise to the risk committee.
If J.P. Morgan had a proxy access
rule, it would not have lacked
directors with risk expertise on the
risk committee at the time of the
London Whale incident.
Consider Shareholder Proxy Access:
• Shareholders with a significant ownership stake
in the company would have the right to put
director candidates on the company’s ballot.
• For the first time in corporate governance, a
company proxy statement could have, say, 10
candidates for eight seats on the board.
• Implementing a proxy access rule would help
ensure the right mix of skills in the boardroom.
Principle #3: Ensuring Shareholder Empowering Shareholders for Informed
:
Participation Decisions

Traditionally, corporate boards often view themselves as the sole protectors of the company against
Problem
activist investors who might propose changes. This can lead to a defensive posture, where boards prioritize
tactics like litigation or poison pills to block any takeover attempts. These "scorched-earth" strategies
ultimately hinder shareholder involvement and prevent them from having a say in the company's direction.

Exampl
In the case of CommonWealth REIT, the board used various legal maneuvers to obstruct activist
e
investors Corvex Management and Related Companies who saw an opportunity to improve the
company's performance. This included imposing burdensome information requirements for
shareholder action and lobbying to change takeover laws.
 Principle #3: Ensuring Shareholder
Participation
:Building a Collaborative and Transparent Approach
• Implement "advance notice poison pills."
Early Warning System • Disclose holdings early to avoid triggering restrictions.
• Gives boards time to prepare a well-informed response.

Focus on Long-Term • Boards proactively engage with shareholders.

Value & • Understand shareholder goals for a win-win situation.
Collaboration: • Avoid "surrender or fight" mentality.

Shareholder Decision- • Boards present their case but respect shareholder choice.
Making & Respect: • Empowers shareholders to influence the company's future.

Benefit
s
• Increased transparency and trust between boards and shareholders leads to a more harmonious relationship.
• With better communication and understanding of shareholder goals, capital allocation becomes more efficient, ensuring resources
are directed towards initiatives that truly benefit the company's long-term value.
• By fostering a collaborative environment and respecting shareholder voice, corporate governance becomes a competitive
advantage, attracting investors who value transparency and responsible decision-making .
 Implementation of Corporate Governance 2.0
Corporate Governance 2.0 represents a fundamental reimagining of governance practices, designed to confront the
challenges of the modern business landscape.

Implementation of Corporate Governance 2.0 necessitates a comprehensive overhaul of governance structures and
practices, anchored in three core principles.

Long-Term Management Board Composition and Ensuring Shareholder

Focus
Shifting the corporate mindset from
short-term gains to sustainable value
creation and responsible stewardship.
Selection
Ensuring the right mix of skills and
perspectives in the boardroom through
meaningful evaluations and
shareholder proxy access.
Participation
Facilitating orderly shareholder voice
while maintaining board integrity and
effectiveness.
 Impact of Corporate Governance 2.0
The adoption of Corporate Governance 2.0 principles holds the promise of significant positive impacts across various
dimensions

Improved Board Enhanced Shareholder

Dynamics
By refocusing on long-term strategies
and fostering more inclusive decision-
making processes, Corporate
Governance 2.0 can lead to more
effective and cohesive boards.
Competitive Advantage
Confidence
Companies embracing Corporate
Through increased transparency, Governance 2.0 principles can gain a
accountability, and meaningful
competitive edge by attracting long-
engagement, Corporate Governance term investors and mitigating
2.0 can rebuild trust between
governance-related risks.
companies and their shareholders,
enhancing overall market confidence.

Corporate Governance 2.0 fosters long-term strategies and inclusive decision-making, enhancing board effectiveness.

By prioritizing transparency and engagement, Corporate Governance 2.0 rebuilds trust and boosts market confidence.
 Challenges and Future Trends
Evolving
Corporate governance faces the challenge of keeping up with ever-changing
Regulatory
regulations and compliance requirements.
landscape
Board
A key trend in corporate governance is the push for greater diversity and
Diversity and
inclusion on boards of directors.
Inclusion

Shareholder Shareholders are increasingly asserting their rights and demanding greater
Activism transparency and accountability from companies.

Technological The rapid advancement of technology presents both opportunities and

Disruption challenges for corporate governance.

Sustainability
Stakeholders expect companies to address sustainability issues, such as
and ESG
climate change, social responsibility, and ethical business practices.
Factors
 Challenges and Future Trends
Companies are increasingly vulnerable to data breaches and cyber-attacks,
Cybersecurity
which can have severe consequences on their reputation and financial
& data privacy
stability.

Executive Excessive executive compensation packages and misalignment of incentives

Compensation with long-term value creation continue to be areas of concern.
Ethical
Conduct and Maintaining a strong ethical culture and preventing misconduct remain
Corporate significant challenges
Culture
Enhance
Improve transparency by providing comprehensive and timely disclosures
Transparency
about corporate performance, risks, and governance practices.
and Disclosure
Business
Business structures also put hindrance on the way to good governance as they
Structure &
require many layers of management, executives and other officers.
conflicts
 Advantages of Corporate Governance 2.0

Corporate Governance 2.0 offers a holistic approach to addressing key issues in corporate
governance, aiming for long-term success and sustainability.

By focusing on principles such as long-term management, board composition, and orderly

shareholder voice, Corporate Governance 2.0 seeks to improve the quality of decision-
making and governance practices.

This approach provides several advantages for companies, shareholders, and the broader
economy, paving the way for enhanced competitiveness and value creation.
Improved Board Effectiveness:
Enhanced Long-Term Performance:
● Corporate Governance 2.0
● By allowing boards to focus on long-
encourages meaningful board
term strategies rather than short-term
evaluations and ensures the right
pressures, Corporate Governance 2.0
mix of skills and perspectives in
promotes sustainable growth and value
the boardroom.
creation.
● Boards equipped with diverse
● Companies can invest in innovation,
expertise and a clear understanding
employee development, and strategic
of their roles can make better-
initiatives without being overly
informed decisions and provide
constrained by quarterly earnings
effective oversight.
expectations.
 Long-Term Vision

Looking ahead, Corporate Governance 2.0 sets the stage for a more collaborative and resilient
corporate ecosystem.

Companies embracing these principles can build stronger relationships with shareholders, foster
innovation, and adapt to evolving market dynamics.

Ultimately, Corporate Governance 2.0 represents a forward-looking vision for corporate governance
that prioritizes long-term value creation and responsible stewardship.
THANK YOU