Dr. Paritosh Basu

July 17, 2015

Acknowledgement

The author does acknowledge that freely available graphics through

internet have been used for this presentation with the objective of

propagating knowledge.

2

Discussion Flow

Corporate Governance Revisited

Management of CG with a 3600 Approach through the

Contours of Value Delivery

CG - Changing Dimensions, Framework and Influencing

Factors

Changing Dimensions of Corporate Reporting - Demands

from Good Corporate Governance

Principle based approach for CG

3If you don’t know what you don’t know, you don’t know how to fix it

4

Corporate Governance Revisited

5

Let us start the session with a small film on Behavioural Psychology

6

Corporate Governance (CG) Revisited – What is CG?

“The conduct of business in accordance with shareholders’ desires,

which generally is to make as much money as possible, while conforming

to the basic rules of the society embodied in law and local customs”

Noble laureate Milton Friedman

“…… is concerned with the way corporate entities are governed, as

distinct from the way business within those companies are managed ……

addresses the issues facing Board of Directors, such as the interaction

with top management and relationships with the owners and others ……Robert Ian (Bob) Tricker

“… is about promoting corporate fairness, transparency and accountability”. James D. Wolfensohn (Ninth President World Bank)

….. is a system of structuring operating and controlling a company with the

following specific aims:

Fulfilling long-term strategic goals of owners

Taking care of the interests of employees

A consideration for the environment and local community

Maintaining excellent relations with customers and suppliers; and

Proper compliance with all the applicable legal and regulatory requirementsCadbury Committee, U.K

7

Corporate Governance Revisited – Guiding Principles

The Ultimate Analysis of Corporate Governance

Mahatma Gandhi’s twin pronouncements

“Businessmen are Trustees.”

“Ends not justifying the means.”

should be the Moral Compass of Corporate Governance

“Good Corporate Governance is about Intellectual Honesty and not just

about sticking to the rules and regulations.” Lord Mervyn King

Governor of Bank of England

Synthesis of Definitions

A good CG Structure

Specifies distribution of authorities and responsibilities among

different participants, e. g, Shareholders, Board, KMPs, other

stakeholders

Lays down rules and procedures for decision making and provides

structure for implementation to achieve a predefined set of goals

Your presenter feels that CG is the other name of Intellectual Integrity. At an emotional plane CG is a set of tasks fulfilled by orchestrated efforts of Heart, Mind and Brain of any role holder in any corporate function.

*

*

8

Corporate Governance Revisited – Patterns of CG

Agency

Construction of internal rules and incentives to effectively align the

behaviour of Managers (Agents) with the desire of shareholders

(Owners)

External regulations are inflicted by the political system for handling

issues related to

Moral hazards to public Interest

Controlling Shareholders (Promoters) vs. Minority

Stewardship

Assumes Managers are good stewards of the Company who

Are self-seeking agents to manage interest of multiple stakeholders

Share the net value they generate with stakeholders

9

Corporate Governance Revisited – Models

Anglo Saxon Model – USA and UK

Wider ownership of company with large holdings by Banks and FIs

Shareholders’ interest is the primary focus with minority protection

provided through laws and regulations

Stringent requirements for disclosure and transparency

Supervisory Board for management

Continental European Insider Model

Relies on the representation of diverse interests on the Board of

Directors including from employees, customers, banks and government

Long term large shareholders provide protection from markets and

The Board operates with Stewardship theory for management

Asian Model - Japan, India, etc.

Large involvement of family control with close trusted relations in

positions of management and also suppliers and customers

Considerable concentration of shareholding in one family or a

closely knit group of families and relations.

History and Evolution of CG Codes and Frameworks

Emergence of Formal CG Codes

OECD Principles of CG – 1999, 2004 and revised 2014

CG Codes from UK – From Cadbury Committee Report 1992 to UK Combined Code 2014

USA CG initiatives – COSO Frameworks of 1992, revised in 2013 and Sarbans Oxley Act, 2012

Principles of governing framework embedded in all the above

Ensuring the basis for effectiveness

Key roles and responsibilities of functional leadership team

Equitable treatment of all shareholders in majority and minority groups

Adequate resource allocation and effective management

Disclosure and transparency without protected confidentiality

Authorities and responsibilities of both Shareholders and Board with effectiveness for tools for accountability

Independence and adequacy of controls

10

Monthly and many more one-offs

Conceptual, Institutional, Regulatory, Legal

Stakeholders, Gov. Group and Management

Measure > Recognise > Record > Report

Corporate Governance is GAAP Agnostic

Frequency

Reporting to

Frameworks

Functions

Pinnacle Challenges, Risks and Sustenance

Critical documents

Risk Register and

Financial Reporting Procedure 11

Global

Country

Entity

Division

12

Five Key End Results of Good Corporate Governance

• Improves valuation of business entities

• Development and well being of citizens

• Improved business ecosystem

Country and States

• Improves resource allocation

• Reduces risks from management failure

• Reduced cost of capital

Capital Structure and Cost of Capital

• Brings in global orientation and focus

• Better management of pervasive risks

• Growth brings confidence for better ERM

Globalisation and Dispersal of Risks

• Foundation development and enlargement

• Improves mobilisation of resources from retail investors for capital formation

Capital Market

• Better Crisis Management by entities and country at times of international shocks

• Inclusive growth and sustainable prosperity

Combined Effects

13

Management of CG with a 3600 Approach

Through the Contours of Value Delivery

14

Do I listen to my conscience keeper?

Increase in Shareholders’

Wealth

Maximisationof Value

Additions & Innovention*

How do I create value with principled

and ethical practices?

*Innovention =

Innovative and Inventive Value Creation

^ Bryan Dyson, former CEO of Coca Cola

Pre-assess impacts

of seeds in the

Womb of Time

“Value has a value

only if its

value is valued.”^

15

How do I align strategic end results

though the contours of value delivery?

STRATEGIC OUTCOMES

Satisfied

SHAREHOLDERS

Delighted

CUSTOMERS

Efficient and Effective

PROCESSES

Motivated & Prepared

WORKFORCE

What for is this vacant space?

16

17Source: Unknown

Step by Step Approach for Corporate Governance

Presently at what stage

India is for Next in Class CG?

18Source: Unknown

Five Key Attributes for CG Management A Common Man’s Perspective

Vision Skills Incentives Resources Action Plan

How does the Board tie up CXOs with

a common thread of Governance Code

Let CG Code guide the steps of business strategy management

VISION - What do

we want to be?

VALUES - What’s important to us?

STRATEGY - What is our game plan?

BALANCED SCORECARD - What will be our Implementation & Focus?

STRATEGIC INITIATIVES - What we need to do?

STRATEGIC OUTCOMES

Satisfied

SHAREHOLDERS

Delighted

CUSTOMERS

Efficient and Effective

PROCESSES

Motivated & Prepared

WORKFORCE

PERSONAL OBJECTIVES - What I need to do?

MISSION - Why do we exist?

I have inherited

these or have

been asked to

obey. How much

say do I have in

changing these?

Is Management

separated from

Ownership to give

independence to

CXOs and other

employees?

19

20

Style of CG since the Economic Crisis – Strategy Formulation

Source: McKinsey Quarterly Survey – July, 2011

Source: Indian Management, August 2011

Good corporate governance demands Board’s active involvement

21

Corporate GovernanceDimensions, Framework and Influencing Factors

New challenges for Core Corporate Functions

Companies Act, 2013

CFO and CS designated as KMPs – CFO to sign Annual FSs

Minority Shareholders may nominate Directors in listed companies

Class Action Suit and eVoting in AGM permitted to be filed

Accountability to all stakeholders beyond shareholders only

Stricter compliance on related party transactions

Reporting beyond SOX

Reporting on effectiveness of Internal Financial Control

Free lance Analysts continue to remain out of regulatory clutch

Ind AS and ICDS already knocked the door

GST and stricter Fin. Management regulations on their advent way

More and more unethical business practices being exposed

Have to ring fence talents and suitably deal with bagagged passengers

NextGen IT enablement - An immediate imperative with ITGC and ISS

22

23

Risk Universe for Consideration in CG

External Risks – Reforms, Market, Technology,

Competitor, Natural, Legal & Regulatory, Political

ImageErosion

FinancialCurrency Exchange

Liquidity

Credit

Direct and Indirect TaxesExternal Reporting GAAP Conversion

Planning

Fraud

Cost ofCapital Info.

Relia-bility

Operational andEnvironmental

Customer Success

Goal Congruence

Health&

SafetyHumanResource

ImageErosion

BrandErosion

Product / ServiceFailure Pollution

R&D

Strategic

Leadership, Product Profile, Product Life Cycle, Business Portfolio, Business

Model, Communication, Org. Structure, Business AlliancesSecrecy

Compliance

Action - Map every ‘Cash Generation Unit’ vs. Risks and Mitigation Steps

Risk Management the other name of Corporate Governance

242011 YTD reported as of November 18, 2011

*Source: Ernst and Young's Turning risk into results report, 2012

Compound annual growth rates 2004 – 2011* by risk maturity level

A company that knows how to take risks in a more calculated and

controlled manner than its rivals, its customers or suppliers will be

able to find sources of profitable value

96% of company executives believe strong risk management has had a

positive impact on their long-term earnings performance

Risk Management and Business Growth – Findings of EY

25

Independence and Value Orientation

Risk and Performance Management

Dis

clo

su

re a

nd

Tra

nsp

are

ncy

Leg

al a

nd

Reg

ula

tory

Bo

un

darie

s

Business Practices and Ethics

Corporate

Governance

Dimensions of Corporate Governance

26Source: http://blogs.rediff.com/fuwyki67/2015/02/08/corporate-governance/

Broad Framework of Corporate Governance

Source: http://www.softexpert.com/governance-risk-compliance-management.php

Corporate Governance Framework with added

Dimensions of Risk Management and Compliance

27

Learning Points from CG Failures

Factors that Influence

Ownership structure – Co-existence of multiple categories *

Composition of Board of Directors and its Sub Committees

Independent Directors – Positions in too many corporate houses

Financial Structure – External debt vs. equity *

Socio-economic environment *

Effective Audit Committee

Risk Management * Value - Maximise creation and minimise destruction *

Multiplicity of Tools *Statutes, Rules, Regulations, Regulators

Discipline in Capital and Bond Market

Systemic problems related to investor friendly information

Demand / compulsive *

Monitoring costs

Dissemination – Accounting *, Financial * and Operational *

* To be directly or indirectly impacted more by IFRS / IND AS 28

Learning Points from CG Failures … 2

Issues and Controversies

Questionable ethics *

Behaviour and attitude at the top

True independence of the Board

Doctrine of Indoor Management – Lifting the corporate veil *

Aggressive earnings management *

Gaps and Ineffectiveness in accounting and reporting *

Faulty executive compensation practices *

Outdated rule based accounting disregarding substance *

People are important than process *

Senior management not responsible for control *

Lack of engagement on the part of shareholders

Fishes start rotting from the head

* To be directly or indirectly impacted more by IFRS / IND AS

29

Learning Points from CG Failures … 3

Attributes and Facets of Good CG

Depends on the culture in which the corporate operates *

Honesty, integrity and transparency beyond regulation *

DNA and value system of the Group – Ethical code of conduct

Top management in a state for readiness to Face challenge *

Deal with fear factor

Responsive to dynamic environment *

Good CG is philosophy and matter of attitude *

Non compromising, adaptable, and scalable *

Trustworthy for all stakeholders *

Sustainability *

Oriented towards ‘Four P Bottom Line’

Protect Existing + Enable Growth = More Results for Stake Holders

* To be directly or indirectly impacted more by IFRS / IND AS

30

31

Changing Dimensions of Corporate Reporting

Demands from Good Corporate Governance

Wider readership

Expanded stakeholders and geographies

Capital / Debt market transactions

Multiple Regulators

Relevance in one language

One source of truth

Reports in XBRL presently to ROC

All submissions to all Regulators in near future

More emphasis on sustainability management

Accounting and Reporting in Changing Environment

Tomorrow’s realities

Accounting Framework

Institutional – AS to Ind AS

Regulatory – Importance will recede

Span and perspective of reporting

Division > Entity > Country > Global

Emphasis on ‘Combined Economic Entity’

32

Global

Country

Entity

Division

CFO’ s anxiety - The horizon for controlling and monitoring is widening

The World is changing – Corporate Reporting must too

Source – World Business Council for Sustainable Development - Vision 2050 33

The world population is increasingly urbanGlobal population by type of area and by region: 1950-2050

Global economic power is shiftingTop 10 economies by GDP in 2050

The global middle class is rapidly expandingPopulation in low- and middle-income countries earning $4,000-$17,000 per capita (purchasing power parity)

Greenhouse gas emissions keep risingGHG emissions by regions

Environmental degradation jeopardises people’s quality of lifePeople living in areas of water stress by level of stress

The world could be running out of some resourcesGlobal supply forecasts according to the implied ultimate recoverable resources of conventional oil, date of peak production and the post-peak aggregate decline rate

Gro

wth

Degra

dation

Source: UN Population Division, World Population Prospects: The 2008 Revision, 2008

Source: Goldman Sachs, BRICs and Beyond, 2007 Source: World Bank, Global Economic Prospects, 2007

Source: UN Population Division, World Population Prospects: The 2008 Revision, 2008 Source: Goldman Sachs, BRICs and Beyond, 2007 Source: World Bank, Global Economic Prospects, 2007

Population increase to 8.5 Bln.

in 2050 from 2.4 in 1950

Shift of Economic Power -

West to East - India 38 Trln.

Middle class population -

400 Mln. to 1200 .

December, 2011

Emerging Gap in Demand Supply of Equity

34

Reduction of ~ $ 23

trillion

Emerging Gap in Demand Supply of Equity … 2

35

Emerging Gap in Demand Supply of Equity … 3

36

Resolution of this problem can to a large extent be solved by transparent

corporate reporting and respect for Minority Interest in actions

*Some of such Intangible Factors are explained in Corporate Reports, but many are not.

It will be useful here to see small vide management film on Invisible Gorilla

Inter-exchange

between

• Tangible Assets and

• Intangible Factors*in an enterprise’s

Market Value

Valuation of listed Indian

Enterprises are on their

way to similar transformation

Evolution of Corporate Reporting …

38Source: Integrated Reporting Council

2000

Integrated Reporting *– The Future

39

* ‘Don’t let others define you’ ! Communicate what you are trying to do

a. Strategies b. Performance c. Prospects d. Governance and

e. Propositions for creating and preserving values in short, medium and

long term – Paul Druckman, CEO of International Integrated Reporting Council

IRC’s final draft for consultation has been published –

Expectations from Analysts will increase manifold

Source: International Reporting Council

: PwC’s World Watch, Issue 1, 2013

40

“Corporate Reporting is no longer a routine mundane compliance

oriented periodical activity. It is an integrated part of Corporate

Business Strategy to bring in value orientation with total transparency”

“Both ‘Integrated Reporting’ (IR) and Enterprise Performance

Management (EPM) can simultaneously serve the requirements of the

entity and the stakeholders.

If both this techniques can be merged and designated as ‘Enterprise

Pervasive Performance Reporting’, it will represent broader expression

of the company’s deliverables, its financial stability, readiness for

achieving stability and sustainability through riskier times.”

Importance of Corporate Reporting

in Present business Ecosystem

Source: Management Tools That Make Corporate Reporting Key Part of Business Strategy

Prof. Paritosh Basu and Prof. Sangeeta Wats

The Management Accountant, May, 2015, Page 22 to 28

Is India is on her way with the above road map. Let us review present

practices with reference to the same of the UK and USA ……

UK Listing Authorities – Financial Reporting Practices Statutory Auditors to review and provide comfort to Board on Extent, Quality,

Speed, Effectiveness and ‘Top Down Risk Oriented Approach’ for

Enterprise Risk Management Framework (ERM)

Functioning of Audit Committee

Internal audit including scope and approach

CFO’s oversight

Operations reporting including procurement and tendering

Arms’ length basis of conducting inter Group Co. transactions

Volatility management – Interest, Currency Exchange , Commodity, Policy

IT and IS General Control (IT&SGC) and Information Safety

Formal documentation and review of SOPs

Directors’ Responsibilities Statement’ to include affirmative statements on

True and fair view of assets, liabilities, financial position and profit

MD&A includes fair review of developments and performance

Description of principal risks and uncertainties

If you don’t know what you don’t know, then you don’t know how to fix it41

US SEC Listing - Application of SOX 404 with Top-down risk assessment

Issuers are required to publish information concerning the scope and adequacy

of the internal structure and procedures for financial reporting (IFC for FRP)

Auditors attest to and report on their assessment of effectiveness of the above

(SAS - 72 provides guidance to auditors about procedures to be followed for providing report

after due diligence)

Need therefore is to identify and assess – by both Management and Auditors

Significant financial reporting accounts or disclosures

Material financial statements risks within these accounts or disclosures

Which entity-level controls would address these risks with sufficient

precision

Which transaction-level controls would address these risks in the absence

of precise entity-level controls

The nature, extent, and timing of evidence gathered to complete the

assessment of in-scope controls

42

Audit Committee will have take up a larger and pervasive role for ensuring

IFC for FRP. Please refer Deloitte’s questionnaire to develop more on this.

Please refer the following

http://www.corpgov.deloitte.com/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/USEng/Documents/Audit%20

Committee/Audit%20Committee%20Resource%20Guide/audit%20committee%20performance%20evaluation.pdf

With ever increasing VUCA how do Corporates

Adopt positive attitude and

Work with principle based approach for CG?

43

Open Compliance and Ethics Group (OCEG)

Governance, Risk and Compliance Capability Model

OCEG worked with a committee of hundreds of

esteemed experts, including many in-house GRC

professionals, external advisors and auditors, and

academics, to develop the OCEG Red Book, which

contains the GRC Capability Model™ – the central

piece of the OCEG Framework.http://www.oceg.org/resources/grc-capability-model-red-book/

“OCEG is a global non-profit think tank and community. Together,we help organizations achieve Principled Performance byintegrating governance, assurance and management ofperformance, risk, compliance and ethics(GRC)”http://www.oceg.org/

Let us take help from OCEG’s suggestions for rejigging our GRC processes

44

Questions for Organisational Introspection?

Source: Website of OCEG http://www.oceg.org/ 45

Acknowledgement by Presenter

The next slide of this presentation is a reproduction form the

presentation in the 18th International XBRL Conference on

Governance, Risk, and Compliance. Panel Session participated by

Lane Leskela – OCEG

Scott Mitchell – OCEG

Scott C. Rosenfelder – Deloitte & Touche LLP

It has been included for the sole purpose of knowledge sharing and

learning management.

46

Elements of the OCEG GRC* Capability Model

(c) OCEG, 2008

ORGANIZE AND OVERSEE

O1 – Outcomes and Commitment

O2 – Roles and Responsibilities

O3 – Approach and Accountability

INFORM AND INTEGRATE

I1 – Information Management and

Documentation

I2 – Internal and External Communication

I3 – Technology and Infrastructure

ASSESS AND ALIGN

A1 – Risk Identification

A2 – Risk Analysis

A3 – Risk Optimization

PREVENT AND PROMOTE

P1 – Codes of Conduct

P2 – Policies

P3 – Preventive Process Controls

P4 – Awareness and Education

P5 – Human Capital Incentives

P6 – Human Capital Controls

P7 – Stakeholder Relations and

Requirements

P8 – Preventive Technology Controls

P9 – Preventive Physical Controls

P10 – Risk Financing/Insurance

DETECT AND DISCERN

D1 – Hotline and Notification

D2 – Inquiry and Survey

D3 – Detective Controls

MONITOR AND MEASURE

M1 – Context Monitoring

M2 – Performance Monitoring and

evaluation

M3 – Systemic Improvement

M4 – Assurance

CONTEXT AND CULTURE

C1 – External Business Context

C2 – Internal Business Context

C3 – Culture

C4 – Values and Objectives

RESPOND AND RESOLVE

R1 – Internal Review and Investigation

R2 – Third-Party Inquiries and

Investigations

R3 – Crisis Response and Recovery

R4 – Remediation and Discipline

Please see the presenter’s acknowledgement on the previous slide

* GRC = Governance Risk and Compliance

47

Further Thoughts Observations

and Questions?

48

Thank You49