Corporate Governance & Corporate Social Responsibility Enhance Stakeholders Value P.K. Choudhury, Vice Chairman, ICRA Limited November 22, 2008

It is not from the benevolence of the butcher,the brewer,or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self love, and never talk to them of our necessities but their advantages Adam Smith Adam Smith

"One and only one social responsibility of business is to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." - Milton Friedman- Nobel Prize in Economics, 1976

Triple Bottom Line Framework SocialEnvironment Economic Sphere u Maximise shareholder value u Market share u Current profits Environment sphere u Eco-friendly products u Recycling waste u Climate protection u Emissions control Social sphere u Community well- being u Regional development u Local issues Economic All organisations have three dimensions to their strategies and operations All organisations have three dimensions to their strategies and operations How to move the three spheres closer? How to align Social and Environmental spheres with the Economic sphere?

Recent Emergence Poverty and insecurity worldwide Poverty and insecurity worldwide Anti- globalisation calls Anti- globalisation calls Mistrust of large corporations Mistrust of large corporations Greater media/IT reach Greater media/IT reach Increased stakeholder activism including increasing investor pressure Increased stakeholder activism including increasing investor pressure Increasing government interest/action Increasing government interest/action

GLOBAL CORPORATIONS Economic impact of large corporations becoming more profound Economic impact of large corporations becoming more profound Of the 100 largest economies of the world 51 are Corporations Of the 100 largest economies of the world 51 are Corporations 161 countries of the world have economies smaller than Wall-Mart 161 countries of the world have economies smaller than Wall-Mart The sales of 200 firms of the world is equivalent to appx. 28% of worlds GDP The sales of 200 firms of the world is equivalent to appx. 28% of worlds GDP

EXECUTIVE MANAGEMENT Professional Managers have enormous powers. Professional Managers have enormous powers. The powers could be misused. The powers could be misused. The owners need to have a control. The owners need to have a control. The minority shareholders need to be protected. The minority shareholders need to be protected. The conflicting interests of different stakeholders have to be balanced. The conflicting interests of different stakeholders have to be balanced.

The Foundation of any structure of Corporate Governance is disclosure. Openness is the basis of public confidence in the corporate system, and funds will flow to the centres of economic activity that inspire trust.- Sir Adrian Cadbury Transparency & Disclosures As more countries move to an equity culture, high quality financial information becomes the currency that drives the marketplace - Arthur Levitt 8 When in doubt, disclose

What, if any, are the benefits of good corporate governance ? According to OECD, only companies with credible and well understood corporate governance practices would be able to attract long-term capital According to OECD, only companies with credible and well understood corporate governance practices would be able to attract long-term capital However, financial theory is yet to establish the linkage However, financial theory is yet to establish the linkage Empirical evidence is available Empirical evidence is available –McKinsey Investors Opinion Report 9

Does better corporate governance deliver higher shareholder returns ? To ascertain this, McKinsey & Co. in cooperation with the world bank conducted a series of surveys The survey gathered response from over 200 institutional investors managing approx. US$2 trillion in assets. 40% of the respondents were based in the U.S., balance in Europe, Asia and Latin America Source: McKinsey Investor Opinion Survey- June

Most investors say that board practices are at least as important as financial performance Source: McKinsey Investor Opinion Study Q: In evaluating companies for potential investment, how important are board practices relative to financial issues? 11

Most investors would be willing to pay more for the shares of a well-governed company Source: McKinsey Investor Opinion Study Q: Would you be willing to pay more for a company with good board governance practices?

The premium that investors would be willing to pay is significant Q What percentage premium do you estimate you would be willing to pay for the stock of a well-governed company? Source: McKinsey Investor Opinion Study 13

Major corporate measures looked at IrrelevantRelevantHighly Relevant Importance of Corporate Level Factors when Selecting Emerging Market Companies in Which to Invest

Why do Stakeholders care about Corporate Governance ? Financial reports and other disclosures can be trusted Financial reports and other disclosures can be trusted Comfort With Product & Service Offerings Comfort With Product & Service Offerings Assurances of Timely Servicing of Obligations. Assurances of Timely Servicing of Obligations. Well governed companies mitigate non- business risks Well governed companies mitigate non- business risks Believe that corporate performance in the long run is correlated with CG/CSR Believe that corporate performance in the long run is correlated with CG/CSR Trust of Regulators Trust of Regulators 15

ICRAs C G R Scale CGR1 – Highest level of corporate governance CGR1 – Highest level of corporate governance CGR2 – High level of corporate governance, but not as high as in CGR1 CGR2 – High level of corporate governance, but not as high as in CGR1 CGR3 – Adequate level of corporate governance CGR3 – Adequate level of corporate governance CGR4 – Moderate level of corporate governance CGR4 – Moderate level of corporate governance CGR5 – Inadequate level of corporate governance CGR5 – Inadequate level of corporate governance CGR6 – Poor level of corporate governance CGR6 – Poor level of corporate governance A sign of + may be added as a suffix to the rating symbol for all categories except CGR1, to indicate the relative position of the company within the group represented by the rating symbol 16

ICRAs SVG Rating Scale SVG1 – Highest category on composite parameter of stakeholder value creation and management as also corporate governance practices SVG1 – Highest category on composite parameter of stakeholder value creation and management as also corporate governance practices SVG2 – High category….. SVG2 – High category….. SVG3 – Adequate category….. SVG3 – Adequate category….. SVG4 – Moderate category…... SVG4 – Moderate category…... SVG5 – Unsatisfactory category…… SVG5 – Unsatisfactory category…… SVG6- Lowest category….. SVG6- Lowest category….. A sign of + may be added as a suffix to the rating symbol for all categories except SVG1, to indicate the relative position of the company within the group represented by the rating symbol 17

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