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

"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,

Triple Bottom Line Framework

Economic Sphere Maximise shareholder value Market share Current profits
All organisations have three dimensions to their strategies and operations

Economic

Environment sphere Eco-friendly products Recycling waste Climate protection Emissions control

Social

Environment

Social sphere Community wellbeing Regional development Local issues

How to move the three spheres closer? How to align Social and Environmental spheres with the

Economic sphere?

Recent Emergence

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

GLOBAL CORPORATIONS
Economic impact of large corporations
becoming more profound Of the 100 largest economies of the world 51 are Corporations 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

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

Transparency & Disclosures

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 As more countries move to an equity culture, high quality financial information becomes the currency that drives the marketplace - Arthur Levitt
When in doubt, disclose
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What, if any, are the benefits of good corporate governance ?

credible and well understood corporate governance practices would be able to attract long-term capital

According to OECD, only companies with

However, financial theory is yet to

establish the linkage

Empirical evidence is available

McKinsey Investors Opinion Report
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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
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Most investors say that board practices are at least as important as financial performance
Q: In evaluating companies for potential investment, how important are board practices relative to financial issues?
100%

33 48

25

More Important Same

39 44 32 23 Asia 36

20
0%

Less Important

Latin America

Europe/US

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Source: McKinsey Investor Opinion Study

Most investors would be willing to pay more for the shares of a well-governed company
Q: Would you be willing to pay more for a company with good board governance practices?
100%

83
83

89
89

81
81

Yes

17
17
0%

11
11 Asia

19
19 Europe/US

No

Latin America

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Source: McKinsey Investor Opinion Study

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?
35%

30%

25%

20%

15% Latin America Asia Continental Europe US/UK

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Source: McKinsey Investor Opinion Study

Major corporate measures looked at

Importance of Corporate Level Factors when Selecting Emerging Market Companies in Which to Invest 0 1 2 Relevant 3 Irrelevant
Distinctions between company and family interests Clearly defined governance arrangements Accuracy of financial reporting Legally enforceable minority shareholder protection Use of performance-related pay for top management Timeliness of financial reporting Coverage of financial reporting Presence of independent (non-executive) directors Establishment of conflicts of interests committee 4 5 Highly Relevant

Why do Stakeholders care about Corporate Governance ?

Financial reports and other disclosures
can be trusted Comfort With Product & Service Offerings Assurances of Timely Servicing of Obligations. Well governed companies mitigate nonbusiness risks Believe that corporate performance in the long run is correlated with CG/CSR Trust of Regulators

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ICRAs C G R Scale
CGR1 Highest level of corporate governance CGR2 High level of corporate governance, but not
high as in CGR1 as

CGR3 Adequate level of corporate governance CGR4 Moderate level of corporate governance

CGR5 Inadequate 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
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ICRAs SVG Rating Scale

SVG1 Highest category on composite parameter of
stakeholder value creation and management as also corporate governance practices

SVG2 High category.. SVG3 Adequate category..

SVG4 Moderate category...

SVG5 Unsatisfactory 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

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THANK YOU