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Independent Directors strengthen audit

The board of directors of a listed company is primarily an oversight board. It oversees the management of the company to ensure that the interest of non-controlling shareholders is protected. It also functions as advisory board. Independent directors bring diverse knowledge and expertise in the board room and the CEO uses the knowledge pool in addressing issues being faced by the company.

The most important function of a monitoring board is to provide direction to the company. In the previous essay, in this space, I argued that it is a myth that the board of directors provides direction to the company in which the promoter (e.g. government, family and a multinational company) holds the controlling interest because the prom-oter does not want to give up the absolute power of formulating str-ategies. In a professionally mana-ged company in which no indivi-dual or group holds significant voting right, the strategies are formulated by the CEO. The board finds it difficult to propose alternative stra-tegies or to audit the strategy proposed by the CEO due to the knowledge gap between the CEO and independent directors.

Another very important function of a monitoring board is to set the 'tone at the top'. It is expected to create the right culture within the company. I wonder whether, in practice, the board sets the 'tone at the top'. I guess that the 'tone at the top' is set by the CEO (or the controlling group) and independent directors do not get the opportunity to set or change the organisation culture, particularly in a promoter-run business. For example, it is unlikely that the agenda of the board meeting includes an item on lobbying with the government or the audit committee knows the account head against which the speed money is adjusted. The board of directors is expected to ensure that the company does not expose itself to reputational risks by engaging itself in unethical behavior. But ethical issues are seldom discussed in the board. The board discusses only those issues that are placed before it by the CEO. It may be interesting to know how independent directors in the board of companies, whose name has been surfaced in the telecom scam, have reacted after knowing that their company might have been involved in unethical activities.

It might be an exaggeration that the board of directors, as an institution, has failed. But, it may not be far from truth to say that the board of directors, as an institution, has failed in its monitoring role. The reasons are quite obvious. Although, as per law, directors are appointed by shareholders, in practice, the incumbent management (CEO or the controlling shareholder group, if the CEO is a professional) appoints independent directors. Usually, an enlightened CEO desires a strong advisory board and not a strong monitoring board. It is unlikely that the incumbent management will select independent directors who can ask uncomfortable questions or who takes the task of monitoring too seriously. Therefore, the board functions as an advisory board rather than a monitoring board. If you ask the independent directors to analyse deliberations in the board meeting and define their roles, perhaps, most of them will come up with the answer that their primary role was advisory. Most independent directors are happy with their advisory role because that helps them to remain within the boundaries set by the 'board room decorum'.
Monitoring might require independent directors to break the 'board room decorum'.Presence of individuals, who are respected for their work in other fields, does not necessarily improve the corporate governance. This has been established time and again by corporate governance failure in companies (e.g. Satayam, Enron, WorldCom) in which the board had luminaries from different fields of work as members.

There is a gap between what we (academics and other experts in corporate governance) expect from independent directors and what they can do in practice. Independent directors, in enlightened companies, improve enterprise performance by providing innovative solutions to issues that pull down the performance of the company. They, through the audit committee, strengthen audit functions and risk management systems. They usually stop decisions that directly hurt the interest of non-controlling shareholders. And perhaps, that is what shareholders expect from independent directors.

 

Role of CEO in Corporate Governance

In today's globalized economy, corporate play a major role in shaping quality of life of the society as a whole. According to Nobel Laureate, Amartya Sen, "Market forces alone are not sufficient for equitable distribution and some sort of intervention is required, be it political or from business houses, towards society."

Companies should be responsible to the society for their activities and owe to the environment in which they operate. Consequently, environmental protection, transparency among stake-holders, education, health, employee welfare activities and compliance with the legal requirements, has gained importance for corporate world-wide.

A company should take a balanced view of the components of corporate social responsibility and implement the strategies in coherence with the vision, mission and values of the company. Corporate Governance is the method by which a corporation is directed, administered, or controlled.

Corporate governance includes the laws and customs affecting that direction, as well as the goals for which the corporation is governed. The principal participants are the share-holders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community.

As a result of the separation of stake-holder influence from control in modern organizations, a system of corporate governance controls is implemented on behalf of stakeholders to reduce agency costs and information asymmetry. Corporate governance is used to monitor whether outcomes are in accordance with plans; and to motivate the organization to be more fully informed in order to maintain or alter organizational activity. Primarily, though, corporate governance is the mechanism via which individuals are motivated to align their actual behaviors with the overall corporate good (i.e., maximum aggregate value generated by the organization and shared fairly amongst all participants).

Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.

Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then th Equitable Treatment of Shareholders: The CEO should respect the rights of share-holders and help share-holders to exercise those rights. He can help share-holders exercise their rights by effectively communicating information that is understandable and accessible, and encouraging share-holders to participate in general meetings.

Interests of Other Stake-holders

The CEO should recognize that they have legal and other obligations to all legitimate stake-holders.

Role&Responsibilities of the Board

The board needs a range of skills and understanding - to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and nonexecutive directors. The key roles of Chairperson and CEO should not be shared

Integrity&Ethical Behaviour

The CEO should develop a code of conduct for their directors and executives that promotes ethical and responsible decision-making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure.

Disclosure & Transparency

The CEO should be ready to clarify the company's position to the share-holders and the board and management to provide share-holders with a level of accountability. They should also implement procedures to independently verify and safe-guard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information

Issues involving Corporate Governance Principles include: -

  • Oversight of the preparation of the entity's financial statements
  • Internal controls and the independence of the entity's auditors.
  • Review of the compensation arrangements for the chief executive officer and other senior executives
  • The way in which individuals are nominated for positions on the board
  • The resources made available to directors in carrying out their duties
  • Oversight and management of risk
  • Other studies have linked broad perceptions of the quality of companies to superior share price performance. In a study of five year cumulative returns of Fortune Magazine's Survey of 'Most Admired Firms', Antunovich et al found that those "most admired" had an average return of 125%, whilst the "least admired" firms returned 80%. In a separate study, Business Week enlisted institutional investors and 'experts' to assist in differentiating between boards with good and bad governance, and found that companies with the highest rankings had the highest financial returns.
  • On the other hand, research into the relationship between specific corporate governance controls and firm performance has been mixed and often weak.

The Role CEO in Corporate Governance

  • To constantly improve what is essential to human progress by mastering science and technology -

Constantly Improve

The CEO must have the oath "If you can't do it better, why do it?" It under-scores our drive to become an ever better and bigger company.

Essential toHumanProgress

The products that are made by the company to find their way into products that provides people the world over with improved life-styles. One must understand and take pride in this. The company must also use this concept to further connect with the external markets and its serve. When the company thinks in terms of the markets it serve, the company becomes more outside-in focused and the company can better seek growth opportunities.

Mastering Science&Technology

The company must put the science and technology to work to create solutions for the customers and for society

Integrity

The company believes that its promise is its most vital product - 'our word is our bond'. The relationships that are critical to the company's success depend entirely on maintaining the highest ethical and moral standards around the world. As a vital measure of integrity, the company will ensure the health and safety of its communities, and protect the environment in all it does.

Respect for People

The company believes in the inherent worth of people and will honor its relationships with those who let it be part of their world.

The company's stake-holders are the engines of value creation; their imagination, determination, and dedication are essential to growth. The company will work to celebrate and reward the unique backgrounds, view-points, skills, and talents of everyone. Respect for people is measured by how the company treats them, by the contributions that flow from the company diversity, by the productivity of the company's relationships, and by a job well done, no matter what the job. The company communities are the neighbors; their acceptance of the company is vital to its ability to operate.

The customers are the company's partners in creating value; their loyalty is its greatest reward.

The share-holders are the beneficiaries of the company's success; their on-going commitment to the company is based on returning to them superior profits over time.

The company's respect for people also extends to the consumers whose lives it touches. The company will strive to answer people's most vital needs: for food, water, shelter, transportation, communication, health and medicine.

Unity

The CEO must think like this, "We are one company, one team." The company believes that succeeding as one enterprise is as important as succeeding independently. Balancing empowerment and interdependence makes the company strong.

As one company, impact on the world is far greater than the impact of any one of its parts. The company's stake-holders will work together, building relationships to create ever-greater value for the customers and consumers the company serves. Outside-in Focus The company believes that growth comes from looking at opportunity through the eyes of customers and all those it serves. Taking an "outside-in" view ensures that the company's efforts are always relevant and that the company's unique talents are applied to "real world" opportunities. The company will see through the eyes of those whose lives the company affects, identifying unmet needs and producing innovative and lasting solutions. The company will bring to this task all of its experience and knowledge as the unique individuals the company are.

Agility

The company believes its future depends on speed and flexibility - mental, emotional and physical. Responding resourcefully to society's fast-changing needs is the only road to success. The company will meet the forces of change with power and grace. The company will make course corrections that demonstrate flexibility as well as courage, and that highlight the company's ability to keep itself aligned with a world in motion.

Innovation

The company believes that meaningful, productive change - solving problems - only comes by looking at challenges and opportunities from new angles and exercising the company's curiosity.

In the name of innovation, the company will make science a way of living. The company will not only master the science of the physical world, but the science of the mind and heart. The company's job is to unlock answers that make a fundamental difference to people's lives. The company will use technology to help lead society forward. The company will conceive, design, engineer, and execute solutions that remove barriers to human potential and productivity.

In a Nutshell -

  • Ensure group-wide adherence and commitment to the principles and values of Pick'n'Pay.
  • Foster a corporate culture that promotes ethical practices, encourages individual integrity, and fulfils social and environmental responsibility.
  • Maintain a positive and ethical work climate that is conducive to attracting, retaining and motivating topquality employees.
  • Develop and recommend to the Board a long-term strategy and vision for the Group.
  • Ensure that the day-to-day business affairs of the Group are appropriately managed by the MDs, and that proper systems and controls are in place for effective risk management of the Group.
  • Ensure, in co-operation with the Board, that there is an effective succession plan for theCEOin place. Recommend to the Board the appointment of MDs and ensure succession plans are in place for those MDs.
  • Consistently strive to achieve the Group's financial and operating goals and objectives.
  • Ensure continuous improvement in the quality and value of the Group's products and service provided. ·
  • Ensure that the Group achieves and maintains a satisfactory competitive position within its industry.
  • Formulate and oversee the implementation of major corporate policies.
  • Serve as the chief spoke-sperson for the Group.
 

Theme address by Dr Madhav Mehra

21st World Congress on Leading 360 Degree Transformation

Theme Address by

Dr Madhav Mehra


My deepest apologies to all of you for not being able to fulfill my overriding duty of welcoming you personally like in all the previous 20 years at the 21st World Congress on Total Quality because of the compelling health reasons. However, such individual concerns should not stand in the way of the challenging work we have before us to get Businesses to lead 360 Transformations through iTEAR , the theme for this momentous 21st World Congress.

The topic that is engaging the minds of today’s leaders even at Davos is why economic reforms have not helped the poor and not led to a holistic growth. The World Council has always believed that the real instrument of growth is business not government. Ford’s model T empowered the masses and made money for itself. Gains spread. But driving Model T in 2011that uses only 2% of the fuel to drive personal mobility will only choke our grandchildren to death. In 1970s, IBM 1401 had 8k memory and filled a room full of steel. Capacity of an iPad today is million times more and eco impact a fraction. Think why such innovation never happened in the auto industry and why it could not think of cars that soak CO2 as you drive?

Unfortunately as businesses succeed they get trapped in old technology that brought them there and thus cause the greatest damage to poor. Thomas Edison is a classic example. Alarmed by the success of his competitor George Westinghouse, Edison launched a smear campaign to demonstrate the dangers of alternate current even going to the extent of electrocuting animals to make his point thus delaying AC to reach the poor as gas lighting companies did to electric companies.

Growth unless it is holistic is divisive and invidious. Holistic growth happens only through entrepreneurship and innovation of the business not by handouts of the governments as has been proved time and again. Africa is a classic example. Nothing has improved the lot of poor more than mobile telephony. Government’s overriding duty is to provide level playing fields by ensuring competition is fair and there is a safety net for the weakest shared by the beneficiaries. Markets are like parachutes. They function only when open.

For this businesses have to be challenged to bring new technologies - innovate or perish. Here the governments do the greatest damage by protecting dying businesses and letting them continue to seek rent turning businesses into parasites upon society preying upon the poor and unfortunate.

Experience shows liberalisation has increased rent seeking. We are threatened by financial plutocracy of the Goldman Sachs variety. Even British legislators have quietened completely after all the talk of banker’s greed. Instead threats are coming from Bank CEOs. Poor neighborhoods are living shorter and unhealthy lives in UK and millions have never had a job in their life time while rich classes continue to scrounge on the system. Obama has lost control of the House despite his health reforms to help the US poor because of big business. Eliot Spitzer who, as Attorney General of New York, fined Citgroup, CSFB and Merrill Lynch $1.1 billion back in 2001 for their fraudulent conduct well before the draconian SOX had the whole Wall Street ganged up against him.

Hegemony of business and government is the most pernicious form of corruption. I am not sure who is corrupting whom. I find them indistinguishable like tea in sugar. All governments pay hostage to the monied class. It enables Pharma MNCs to discourage sales of mosquito nets to sell their medicines and abuse patent laws against Indian generics by incremental improvements. It permits companies to cartelise, abuse their dominance without impunity and turns markets into casinos denying benefits of globalisation to the poor and making a farce of liberalisation and free competition.

Problem also lies with our own intellectual class who sit on the boards as independent directors commanding salaries more than executives but finding it difficult to independently understand something when their remuneration depends on not understanding it.

So what can we do to fix it? Firstly we have to make businesses aware that never before in human history there was so much opportunity to make money through clean, green and gharib agenda. That will happen only if they become scathingly self critical and brutally transparent. To do this, like Shiva and Schumpeter, they have to go for creative destruction, continually disrupting the status quo harnessing turbulence through constant innovation, powered by transparency, engagement, accountability and responsibility.

We cannot do this unless we challenge our Harvard led business school model that turns out graduates who know how to perfectly seize the known but not how to seize the unknown imperfectly. We talk about governance deficit but the problem is ethical deficit that starts with our education based on success at all costs, winner takes all, do it right first time and short termism fed by concealment, cosiness (Grouphink:Irving Janis,1972) and corruption to get rich quick to pay back the king’s ransom paid for admission. What they need to learn is how to handle failures. Poor’s lot is not going to change without unleashing a nationwide spiral staircase of innovations . No innovation is going to happen without thousands of failures. Glory lies not in succeeding every time but rising faster each time we fail. We have to learn how to wear failures like badges of honour.

Instead of paying lip service to Mahatma Gandhi let us remind ourselves one of his primary message about the purpose of our effort: “Every action we contemplate should in its implementation wipe the tears of poor and downtrodden. Only when we have wiped the tears off the eyes of all the poor, have we truly arrived as a nation.”

 

Dr Madhav Mehra is the President of the World Council For Corporate Governance

   

Independent Directors are expected to get more than Five-Year term

 

India faces major climate changes by 2030

A new report says India could be 2 degrees Celsius (3.8 F) warmer than 1970s levels within 20 years - a change that would disrupt rain cycles and wreak havoc on the country's agriculture and freshwater supplies, More flooding, more drought and a spreading of malaria would occur, as the disease migrates northward into Kashmir and the Himalayas, according to the report by 220 Indian scientists and 120 research institutions.

The temperature rise, which could be even more extreme along the coasts, would cause drastic changes in India's rain cycles that threaten water supplies and agriculture - the key source of livelihood for most of India's 1.2 billion people.

The report comes out just weeks before the Nov. 29 start of the U.N. climate summit in Cancun, Mexico, where nations will try again to reach a global agreement to limit greenhouse gas emissions thought to contribute to global warming. Last year's UN climate summit in Copenhagen ended with an international pledge to limit the rise of the Earth's average temperature to 2 degrees Celsius (3.8 F) above levels recorded before industries began pumping carbon dioxide into the air 200 years ago.

The new report by the Indian Network for Climate Change Assessment exceeds UN expert predictions that suggested India could be 2 degrees warmer by 2050. "There is no country in the world that is as vulnerable, on so many dimensions, to climate change as India is,'' environment minister Jairam Ramesh said in a statement released with the report. "We must continue this focus on rigorous climate change science.''

India's many ecosystems and proximity to the equator make it particularly sensitive to climate change. The fact most of the country relies on freshwater sources, rather than desalinating sea water, amplifies the threat of global warming on society. The report also says sea levels will continue to rise, threatening India's more than 4,000 miles (6,400 kilometers) of coastline.

Mangrove forests along West Bengal's coastlines "would definitely go underwater, said Sidarth Pathak, a climate policy official with Greenpeace India. Coastal cities such as Calcutta, Mumbai and Chennai might also face a threat, he said "This study enables India to look at its need to adapt to change,'' Pathak said.”It will put pressure on the Indian government and international governments to act, and show that India is a vulnerable country.''

India has pledged to spend 2 percent of its gross domestic product on projects to deal with the affects of climate change. Activists have said that's not enough, given the challenges in providing water, food and disease prevention to such a large population. In Cancun, countries are hoping for an agreement that commits nations to curb emissions, to share technologies, and to help poor nations fund projects for coping with a warming planet.

   

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