1. ICAI International Conference
Corporate Governance
- Fact or Myth
D D Rathi *
Director & CFO
Grasim Industries Limited – Aditya Birla Group
13th December 2007
(* Views expressed are personal)

2. Corporate Governance – Fact or Myth
A bold theme – spanning to two extremes
The obvious answer is that “it cannot be a Myth”
Point to be debated is the level of governance achieved
Key background issues -
Governance generally
What is corporate governance and what are its essentials
Growing significance and benefits
Corporate Governance initiatives and enactments
Current status of Corporate Governance, bench marking and challenges 2

3. Governance generally
Governance concept applicable to every entity and every individual
Good Governance essential in every walk of life
Well defined Governance Practices more critical to Corporates as they are “Artificial legal entities”
- Corporate Governance, though not articulated or defined as is being done now, it has been always there right from the time the concept of artificial legal entity came into existence
- Management and ownership with different set of people
- Different stakeholders

4. What is Corporate Governance ?
Many definitions have been articulated
Difficult to define comprehensively in few sentences
Corporate Governance is about commitment to values and ethical business conduct
Good Corporate Governance is reflected in fair, equitable, transparent and responsible interaction between a Company’s -
Management
Board of Directors
Shareholders
Other Stakeholders

5. Essentials of good Corporate Governance
Corporate Governance is first about values and then about structure, system and processes
Should not be just ‘check list’ concept, but should be a way of life
Four pillars of good Corporate Governance
Fairness
Transparency & Disclosures
Accountability, and
Role Clarity
Responsibility of the Board, Chairman, CEO, CFO & Other Executives
Key Principles of Corporate Governance
Respect right of minority shareholders
Equitable treatment of shareholders
Rights of other stakeholders
Social Responsibility (CSR - as a caring corporate citizen)
Trusteeship culture

6. Growing significance of Corporate Governance
Corporate Governance has acquired greater significance in India
Globalisation and large Capital requirements
Increasing complexities of the organizational structure
Gradual distancing of Ownership from Management
Geographical expansion of Investor Base
Emergence of Large Institutional Investors, foreign & domestic both
A series of global financial and corporate crisis
Indian Corporates very well recognise linkage of Corporate Governance to
Valuations of the Companies
Attracting capital at lower cost
Attracting & retaining talented human capital

7. History of Corporate Governance Initiatives and Enactments
Initiatives and Regulatory enactments – International examples
Cadbury Committee (UK) – 1991
HAMPEL Committee (UK)
Blue Ribbon Commission (US)
Ad hoc Task Force OECD
Sarbanes Oxley Act

8. History of Corporate Governance Initiatives and Enactments – contd.
Initiatives and Regulatory enactments - India
Concept not new to India – Trusteeship culture is age old
Ram Rajya - Role of King, Society & Priest
Appropriating part of profit for charity (social responsibility)
Constitution of SEBI in 1992
National Task Force of CII – 1996 – Chairman Mr. Rahul Bajaj (Voluntary measure)
Kumar Mangalam Birla Committee
(Resulted in Introduction of Clause 49, first structured regulation)
Naresh Chandra Committee
Narayan Murthy Committee – 2003
Companies Act Amendments
JJ Irani Committee on Company Law
December Amendment to Listing Agreement
Amended Clause 49 - A landmark step

9. Can Regulation alone ensure good governance ?
We do need basic regulatory frame work
But we need even much large body of self regulation and spirit of voluntary compliance
Good governance practices will evolve through blend of regulatory frame work and voluntary compliance

10. Should Corporate Governance be just restricted to compliance of law ?
“Corporate Governance” is not a “Tick Box” concept but has to be a way of life
Governance frame work should focus on “Substance” and not merely on “Form”
You do it because it is the right thing to do … and not just because the law commands you to do it
Good Governance goes beyond legal compliance
Compliance
Value Creation
Excellence
Benefits of Good Governance - leading to excellence in management

11. Indian Corporates - Current Corporate Governance Status
Indian Corporates have come a long way on Governance practices
Improving Structures & Functioning of the Board and its Committees
Code of Conduct for Board & Senior Management
Disclosure practices - continuous and timely disclosure
High quality of Accounting Policies and Accounting Standards
Clause 49 requirements
Investor Relations practices - transparency & uniform dissemination of information
Insider Trading codes
Quality of Annual Report
Consolidated Financial Statements
Segmental Reporting
Management Discussion & Analysis
Reporting on compliance and its certification
Corporate Governance has started to percolate to mid level corporates as well
Comparison of Corporate Governance Practices with China, Other Asian Countries and Sarbanes Oxley Act

12. Some CG parameters – Comparative Status
India
USA UK
China
Japan
Singa-pore
Hong Kong
Austr
-alia
Board Composition - Independent Directors ü
Required separation of chief executive and chairman of the board roles
X X
Compensation Committee - Independent Directors X
Code of ethics for senior financial officers required
Audit Committee - Authority to engage outside advisers
Management required to forfeit bonuses or other compensation if a restatement occurs
Management required to certify internal control structure and/or disclose controls
Restriction on loans to officers and directors
Required rotation of audit partners $
Rules regarding disclosure of off-balance sheet transactions and contractual obligations
Rules regarding disclosure of forward looking earnings guidance
X - Non Mandatory XX - Encourages / prescribes alternate $ - Under consideration
Source: Deloitte Haskins & Sells

13. Asian Countries Scorecard - %
CG Rules & Practices
Enforcement (public/private)
Political / Regulatory
International GAAP
CG Culture
Hong Kong 60 56 73 83 61
Singapore 70 50 65 88 53
India 59 38 58 75
Taiwan 49 47 46
Japan 43 52 72 44
Korea 45 39 48 68
Malaysia 35 78 33
Thailand 36 31
China 25
Philippines 19
Indonesia 22
Source: ACGA Research

14. Corporate Governance - Ranking
Country
Rank 2005
Rank 2007
Hong Kong 2 1
Singapore
India 3
Taiwan 5 4
Japan -
Korea =6
Malaysia
Thailand 8
China 9
Philippines 10
Indonesia
Source: “CG Watch 2007”, ACGA & CLSA
High Ranking of India among Asian Countries ; Corporate Governance not a myth in India

15. Corporate Governance Standards in India Vs Averages of Asian Countries
Good financial reporting among top companies, but sharp fall off among rest of market (> 6,000 listed companies)
Public enforcement improving, but private enforcement limited and obstructed (e.g., by legal system)
SEBI more independent than many Asian Securities Commissions
Media freedom much higher than Asian region
Noticeable gap between accounting standards and international norms - but gap narrowing
Average
Source: “CG Watch 2007”, ACGA & CLSA

16. Challenges in Corporate Governance
Large unlisted corporates not covered by Corporate Governance norms
Stronger Boards and Committees
Independent and Professional Directors
Audit Committee with right composition
Defining roles of Board, Committees and Executives
Compensation policy for Directors and Senior Executives
Risk Management
Sustainability Reporting
Independence of Auditors (Statutory and Internal)
“Tick box” approach vs. “Letter and Spirit” compliance. Be a step ahead of Regulation
Those who call Corporate Governance a myth are looking at the gaps,
which we need to collectively fill

17. Challenges in Corporate Governance - Contd..
Disclosures of Off Balance Sheet Transactions
Disclosures of substantial risks being carried in Balance Sheets (e.g. Sub Prime mortgage)
Define processes to achieve compliance
CEO and CFO certification
Compliance certificate from Auditors
Enhanced commitment at all levels of Corporate ladder needed – should not be treated as responsibility of finance functionaries and CEO only
Multiplicity of Regulators and compliance Cost
Those who call Corporate Governance a myth are looking at the gaps,
which we need to collectively fill

18. Summary Regulatory framework in place
Value of good governance and its benefits well recognised by Indian Companies
Significant move seen towards voluntary compliance, i.e. from legal compliance to conscience
Indian Corporates ahead of China and other Asian Countries
Improve governance standard for mid size companies coming to capital markets
Simplified and unambiguous regulations will encourage high standards of Governance and help reduce compliance cost
We have come a long way in improving corporate governance practices,
but yet to reach pinnacle - march to excellence continues

19. THANK YOU

20. Why has CG become so topical ?
The main causes in recent times have been a series of financial and corporate crisis
Asian financial crisis (1997 / 98)
Dotcom boom & bust (2000)
Enron, Worldcom and Tyco scandals in the United States (early 2000s)
Parmalat earnings mis-statement scandal in Italy in 2002/03, as well as similar events at Ahold in Holland and Alstom in France
Economic downturn over
Non-performing loans among state banks in China
Problems associated with family and state ownership in Asia (not all bad, but abuses have occurred)
Sub-prime crisis in USA 6A 20

21. Corporate Governance is not new to India
Ram Rajya
KING – enjoys power but is responsible for deliverables too
SOCIETY – well defined behaviour norms
PRIESTS – acts as independent check on King as
Intermingles with society & get feedback
Don’t get paid by King, hence independency ensured
Enjoys courage of conviction
Appropriating part of profit for charity (Social Responsibility) 8A

22. Tentative Conclusions
There appears to be a broad link between the ranking of most markets in our “CG Watch 2007” survey and the size of their “gross national income” (GNI) per capita
Exceptions are clearly India and Japan. Each has certain particular and unusual characteristics
India : A large populations (hence low GNI per-capita); economic reforms started much later than China (1991 vs 1978); yet corporate governance reforms started early by regional standards (1998) and the country has some pockets of world-class corporate governance
Japan : Began industrializing in the 19th century, hence a big headstart on GNI per-capita; high levels of wealth and economic success in the 1970s and 80s may well be a factor in Japan’s insularity to global norms of corporate governance
Source : CG Watch Survey 2007
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23. Benefits of Corporate Governance
Enhances the long-term value of the company, its shareholders and other stakeholders
Provides easy access to large capital
Lowering of Cost of Capital (Debt & Equity both)
Recognition of Indian corporate globally and increased investments in Indian corporates
Protects the investors and accelerates growth of Capital Markets
Brings excellence in systems and control procedures
Attracts talented Human Capital
Board / Committees help strong & transparent decision making process
Focus on accountability of key executives (CEO / CFO Certification)
Acceptability of takeovers / acquisition of overseas corporate by Indian companies
Standardisation of Risk Management process
Good Corporate Governance facilitates improved & sustained performance
10A

24. Regulatory Environment and Compliance Cost - changes needed
Multiple Regulations
Company Law
SEBI / Stock Exchanges
Conflicting provisions
Some over-regulation issues
Composition of the Board
Fifty percent as Independent Directors
Retirement age
Reservation for different classes
Stringent qualification for independent directors
Excessive disclosure eg. Audit Reporting
Compliance cost increase, a cause of concern
Simplified and unambiguous single point regulation –Flexible/ Dynamic
Balanced disclosure practices
- Concept Paper on Company Law leaves lot to “Rules to be prescribed”
- Fairness in Regulatory Environment will greatly motivate voluntary compliance
- Shareholders over activism - some governance norm for them too ?
- Lost should follow in ensuing sessions on this topic
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