WORLD COUNCIL FOR CORPORATE GOVERNANCE 

1. I first take this opportunity to bow my head to the great spirit of Shri Kishan Kantji our Vice President who set some of the best standards of governance in this century and which we have realized only after his untimely demise.

2. Good governance is a movement that we started in IOD at its inception 12 years ago. We felt the best way to clean the staircase is to start from the top. So we set up this institute to educate directors how to lead their companies to excellence. We started with quality because this is the key to competitiveness. Unless we can make products which are of world class standards we cannot stand the competition. We gradually moved up and found society needs much more than the narrow concept of quality. We do not just need to improve the quality of products. It is more important to improve the quality of environment. A product that may satisfy short term needs of the custom but its use or disposal causes damage to the environment is not a quality product. We propagate not only the QMS standards called ISO 9000 but also the ISO-14000 EMS standards alongside. We went a step ahead and found that in order to realize full potential of our work force we must also have the companies certified to ISO 18000 standards involving occupational health and safety.

3. Stock market scams that first came to notice with Harshad Mehta followed by the South East Asia meltdown of late nineties brought home to us the importance of good corporate governance the need for transparency, accountability, equity, integrity and probity in the stock markets. We noted that while the cost of non-quality is just 25% of the turnover, corporation, if not run on the principle of good corporate governance, can destroy shareholder value to the tune of 99% as has been shown recently by Enron, Tyco, Global Crossing, Adelplia, World.com etc.

4. For the past 5 years, therefore, our focus has been shifted to creating awareness of the importance of good corporate governance. We moved from the traditional line where the purpose of corporate governance is stated to be to create shareholders wealth. We felt that this equation brings on adversarial approach vis-a-vis other shareholders and need to be changed in the knowledge economy. Wealth in the knowledge economy is created not by the shareholders or the Board of Directors whose vision admittedly is of overriding importance, but the success and innovation of the employees who never figured in any definition of corporate governance. We felt that corporate governance which says that company is meant only for shareholders and where employee whose equity is no less, have little say, is not corporate governance but corporate greed. We also felt that the companies true business is not only to create wealth for the shareholders but also become an instrument of social transformation by ensuring employment, health and social services to the community with which they worked.

5. In the various interactions of IOD with Government, Civil Society and business during the last 5 years it has been felt that if our purpose is to apply the principles of equity, accountability and transparency, our agenda needs to expand to go beyond the governance of corporates and to governance in general. It has been argued that corporations are a subset of the society and the ills that affect the governance of corporates today are no different from those of the society at large. Also principles of governance are universal in nature and little purpose is served by restricting their application only to corporates. In any event the corporates in order to be effective have to interact with civil society of which indeed they are an integral part. It is, therefore, more appropriate to direct our focus on all aspect of governance and treat corporate governance as part of national movement for overall improvement in good governance.

6. A close examination of the problems of our time reveals that good governance and not scarcity of resources is at the heart of every one of our egregious and intractable problems including poverty, inequality and environment. In the final analysis it is the policies that governments adopt that affect the economic and social well being of the community. The issue of legitimacy, transparency, equity, accountability, probity and integrity are far more powerful in creating and sustaining wealth and improving quality of life than the existence of national resources. With little natural resources, the deserts of Dubai are home to more holiday tourists than the abounding beauty of our Himalayas. The biggest challenge for the national governments of today is to ensure that all citizens realize their full and true potential. Once that is done, nation’s performance excels in every area as has demonstrated by South Korea who can not only produce the best automobile designs but also exhibit superb performance in the Word Cup.

7. In a democratic country like ours it is important to make the electorate, the legislature and law makers aware of the disaster that can be wreaked through mis-governance. Corruption in government is one example. In the last International Conference on Corporate Governance in Mumbai, speaker after speaker brought home the incalculable damage being done by corruption to developing countries like India. The corporate scandals in US have shown that corruption and fraud are not limited to India but its consequences are much more severe here. No development can take place unless we can get rid of corruption. No amount of increase in capital resources can help. Even Rajiv Gandhi, the former Prime Minster said that only 15% of the development and antipoverty expenditure reaches the real beneficiary. We spend over Rs 30000 crores on poverty eradication programme. This means over Rs 25000 crores is siphoned off on the way and only 5000 crores reaches the real poor. This is a gigantic sum and hence the justification for a massive awareness programme on the damage of corruption.

8. It is often argued that since all parties in India are corrupt, the issue of corruption is irrelevant for the Indian electorate. It is this cynicism that we have to combat. We have to create awareness that corruption is the greatest sin, that we must change our ways of acquiring wealth.

9. Mehboobul Huq a great economist of Pakistan origin has done a brilliant analysis of corruption in South Asia countries such as India, Pakistan, Sri Lanka and Nepal. He says, the corruption in South Asia is upstream and not downstream. It is the upstream corruption which is the most dangerous type. The corruption money travels on wings and not wheels. It is deposited in Swiss Bank accounts. If it was kept in India it could be some use to our economy. Thirdly corruption often leads to promotion instead of prison. You will be able to think of many examples without my naming them. Corruption in India generates poverty and perpetuates poverty as nowhere else in the world. Millions of people are forced to live below the poverty line with no hope ever in their life of breaking the cycle. It is a tragedy of history that Indians who today are rated among the brightest in the world are helpless to alleviate the poverty to which our people are condemned.

10. The case for good governance in India cannot be overstated. The link between corruption and poverty is irrefutably established. Corruption is so deep rooted, even our medicines are adulterated. Containing corruption is saving human lives.
11. Wall Street seems to have pronounced the death knell of capitalism. It has fallen victim to the worst form of crony capitalism of which it used to blame the Asian economies. Never before has the downward-slide been so persistent, so long and so sharp. Every measure that the US government is taking to prop up the market or the dollar seems to be working otherwise. The slide continued unabated even when President Bush was exhorting US business in Alabama to boost the confidence in the US economy and the dollar. The disease has caught up with Europe as well and no doubt is going to afflict, the rest of the world. Dollar’s weakness is not a good sign for the exporting countries of Asia and the region’s fragile economic recovery.

12. The strange thing about the latest stock market collapse is that it has not nose dived because of Japanese dropping the atom bomb on Pearl Harbour or Saddam Hussain’s attack on Kuwait or the Twin Tower attacks of 9/11. Americans have simply lost faith in the ability of their iconic enterprises to return their savings. The accounting frauds committed by the likes of Enron, World.com, Global Crossing, Tyco, Adelphia, Qwest, Dynergy, Xerox and the list goes on, have brought home to average investor that the earnings these companies disclose cannot be trusted. Nearly 1000 US companies have had to restate their earnings since 1997 and many more are under investigation. It is not that the fancy accounting tricks were only confined to Andersen who has been convicted in a Texas court of obstructing justice. Some of the big names of Wall Street such as Merryll Lynch have been found guilty and fined for publishing deliberately misleading research and ignoring egregious conflicts of interest.

13. While India and other developing countries are fortunate in not having been infected with this problem to such an extent, may be they did not pay heed to the World Bank advice of using American model and use American audit firms, their penchant for inflating profits and earnings is no less. A recent study by India’s credit rating agency CRISIL stated that 139 companies including infotech giant WIPRO, and star companies such as TISCO, NOCIL and SPIC had resorted to creative accounting and inflated their asset base in 2000-2001.

14. It is not the first time that the stock market has crashed or we have seen the emergence of ugly head of corporate greed. The history of capitalism is replete with examples of similar excesses starting with the affair of the tulips in Holland and the South Sea Bubble. The general assumption is that like the previous market collapses, the current crisis will spur reforms, make corporates more ethical and help market emerge stronger than before. President Bush has already called on stock exchanges to require companies to appoint majority of independent directors and audit and remuneration committees to be all independent. There is ,of course nothing new in his proposals. All this has been an integral part of corporate governance folklore which the Washington based secretariat of the World Bank and Paris based OECD Secretariat are assiduously lecturing the emerging markets about. It is assumed that rationalization of the markets; stricter punishments for defaulters, curbing the stock options, banning of consultancy by auditors, bringing more independent directors, increasing transparency of accounts and making auditors independent will bring back sanity to the markets.

15. The tragedy is that all this has been said before and time and time again. It is the implementation of all this which is fraught with egregious problems. Lord Young, the president of UK’s Institute of Directors has already lambasted the institution of independent directors and called for the abolition of the non executive posts. He argued that relying on part time outsiders who barely spend 15 hours a year to police boardrooms was naïve and dangerous non-sense. Paul Sarbanes, the US Senator has introduced a bill to set up an independent body to supervise the accounting profession, which is likely to become law despite opposition by professionals. Again will this help? Remember, Andersen, auditor to both Enron and World.com had already separated from its consultancy, now called Accenture. The remaining Big-four still have to do it.

16. The malaise in the governance of corporations is far deeper than what appears on the surface. Capitalism, it has now emerged, is far more deeply flawed than our analyses suggest. By feeding on ruthless competition and promoting a culture of winner takes all, capitalism has spawned virulent individualism which has grossly discounted the value system based on ethics. Corporates still use moral language but they do not believe it has any objective foundation. Like George Bush they tell other corporates Do as I tell you, not as I do. Naturally nobody listens.

17. With growing dominance of the markets and emphasis on immediate gain people’s behavior is guided almost exclusively by prudential and not moral consideration. They obey the rules, remain within the law, follow the norms, respect values only if they calculate that these will benefit them personally. They do not accept the validity of moral discipline if it runs counter to their personal objectives. In a policy driven by competitiveness and aimed to enhance the authority of markets, individual action has little to do with ethical behavior.

18. The rational market participant is supposed to treat everyone and everything as a means to serve his/her ends. The imperative is simply to achieve the greatest possible satisfaction of our personal preferences. So what is wrong in the CEO paying himself astronomical salary and bonus, while he is sacking the workers in the name of cost cutting and downsizing?. Why should the independent director ask awkward questions on company accounts or CEOs pay hike? He gets only a fraction of his remuneration from the company in director fees - a lot more comes from the consultancy services provided by his / her private company. Similarly what is wrong in auditing companies flogging their other services to the clients?. The fact is that you get ahead as an independent director or an auditor by billing large fees and not by blowing the whistle. As Mike Rake, the international chairman of KPMG now admits, having a $3 million audit fee and $ 100m non-audit services fee just does not meet the perception test. It is not for nothing that auditing firms advertise themselves all-purpose solution providers. Here is an example from Ernst & Young’s website :

19. Our 84,000 people in more then 130 countries worldwide can implement a broad array of solutions in audit, tax, corporate finance, transactions, online security, enterprise risk management, the valuation of intangibles, and other critical business-performance issues.

20. Would you ever rely on a food inspector who also sells catering services to the kitchen he / she inspects?

21. Lester Thurow wrote, nearly 40 years ago, in The Future of Capitalism that, ‘Paradoxically, at precisely the time when capitalism finds itself with no social competitors - its former competitors, socialism or communism, having died - it will have to undergo a profound metamorphosis’. It is time we began the process to bring about this profound metamorphosis.

22. The centrality of corporate governance lies in its emphasis on transparency. It is far easy to say but most difficult to implement. You cannot obtain transparency if investors expect double digit profits in each quarter. In our rapidly changing economy variations are an integral part of business. So why are we defensive about shortfalls?. We practice the three types of truths we all know - first truth is what we tell others; the second truth is what we tell ourselves but do not tell others. The third truth is what we do not even tell ourselves. The malaise in corporate governance is so deep rooted that we do not even tell ourselves that it exists. This is why it has to make its presence felt every so often by market collapses causing pain and suffering to poor shareholders for no fault of theirs.

23. It is curious that each time we are confronted with market collapse our immediate response is to tighten the rules and revise the codes little realizing that corporate discipline is not something that can be achieved simply by revising codes or adding new ones. The very people who are crying for retribution were part of procession of cheerleaders of Kenneth Lays and Bernie Ebbers. They are the ones who stoked the fires of impossible expectations with, what The Economist says, an unfailing supply of hero worship, with their idiosyncratic maxim that you either get it or don’t get it. Investors were so inebriated with irrational exuberance that they almost willed the companies to tell lies.

24. One of the problems of the modern economics is that we have no perfect business models. We often aim at fastly moving targets and are bound to have a few misses. We are oblivious to the fact that failure is also value adding, that failure is the precursor of success and that no success has ever been achieved without failure. In a relationship based on trust and transparency, failure is an investment and would need to be capitalized and not expensed. Hundreds of Silicon Valley companies have demonstrated that failure is a badge of honour, that people should be rewarded for good tries.

25. As humans, we recognize that we reach perfection by learning from mistakes. So why do we hesitate in owning our mistakes and sharing them with our colleagues in the board & the shareholders? We are on a journey of continuous improvement where everyday I am doing better & better.

26. Transparency calls for sharing of mistakes with your board and shareholders. Their real concern is not that you did not achieve the double digit earnings-growth, but what are you doing about it and where is your plan of action for the next quarter. Investors are looking for management with their eyes on the ball who may lose a game but can demonstrate a compelling strategy that will finally win the match.

27. In any event market capitalization today is not determined by quarterly profits or earnings. Study after study has indicated that buyers are thronging to companies which have societal, environmental and social messages. So why inflate earnings and risk the wrath when you are exposed?. Think how it would spoil your reputation the very key to market capitalisation.

28. We must realize that knowledge economy behaves differently from capital economy. Success in the knowledge economy requires boards to change their industrial age paradigms. Far more value is added by promoting the concept of sharing than competing. Sharing adds value to both sides because knowledge unlike capital is not limited by tangible assets which can be used only for one purpose. Knowledge is a fluid tangible asset that can be transferred at little cost. But sharing cannot take place without trust and trust can come only through transparency.

29. The problem of the American system is that it is skewed heavily in favour of shareholders. The practice of corporate governance was aimed to give the CEO unfettered authority to hire, fire and reward in the name of creating wealth for shareholders and to mitigate principal agent problem. In practice most CEOs use this authority to reward themselves with huge pay hikes and vast bonuses by inflating earnings. This was largely an American disease. But of late European CEOs are also copying their US counter parts in this respect and awarding themselves hefty rises. Prudential shareholders had a hard job in preventing their boss to award himself bonuses worth £900,000. While CEO’s salary in US quadrupled in 1990s, the employees salaries only increased by 3%. Such actions take away employees confidence in management. Governance that says shareholders should get most benefits and does not care about employees who dedicate their lives for corporation is not governance but corporate greed.

30. In their book, The Stakeholder Corporation published in 1997, Wheeler and Silanpaa have asserted that during most of the 20th century in the UK and USA, stakeholder inclusive enterprises fared better than shareholders - first companies. Stakeholder inclusive corporations invariably lead to better long term business performance.

31. More and more people today, individuals and groups expect a business organization to adopt a triple bottomline approach, be economically viable while becoming, environmentally and socially responsible. They also expect the business to be inclusive and ethical. Kenichi Ohmae argued in The Borderless World: Power and Strategy in the interlinked Economy that: A corporation is a social institution whose responsibilities extend far beyond the well being of its equity owners to giving security and a good life to its employees, dealers, customers, vendors and subcontractors. Their whole life hinges on the well being of the corporations.

32. Peter Drucker, in his now classic The Concept of the Corporation, said over 50 years ago that what is needed in a redefining of the corporation as a social institution is an integration of the worker as a partner in the industrial system and as a citizen in society. Yet most corporate governance definitions even today do not include employees as the beneficiary of the corporate rewards in the same way as shareholders.

33. If the capitalism is to survive, if it is to create wealth, it is absolutely essential that it adopts an inclusive approach to make it sustainable in the long haul. It must incorporate the social and environmental agenda, not as add-ons to a company’s economic activities but as an essential and integral, part of business strategy and its processes, to reflect the rapidly changing post-industrial economy.

34. The ultimate aim of good corporate governance must be to make corporations good corporate citizens. Corporate citizenship calls for creating value for the society as a whole and goes well beyond corporate social responsibility or corporate philanthropy. The transformation is achieved by following the 11 point agenda.

35. Sustainability
Corporate governance must recognize that at the heart of successful business there needs to be a promise of long term prosperity for all its constituents. Corporates must move away short term approaches and link all their actions to long term horizons.

36. A triple bottom line
Good corporate governance recognizes that a business has social, cultural and environmental responsibilities to the community in which it seeks a license to operate, as well as economic and financial responsibilities to its shareholders. Corporate citizenship is about business redefining the way in which a company focuses on a triple bottom line approach that brings financial rewards while meeting social and environmental obligations.

37. Making a difference
Business’s foremost purpose is to make a difference in society. It is more than philanthropy and beyond corporate social responsibility. Corporations must refit themselves into businesses which provide services the society needs rather than create artificial demand for obsolete products or services.

38. Employee and stakeholder empowerment
Corporate citizenship seeks to ensure that every one associated with the corporation is empowered to be able to contribute creatively an proactively. It must recognize that people want to become involved and it is for the Corporation to innovate strategies to make it happen.

39. Transparency
No teamwork is possible without trust and transparency. Business must be truthful in disclosing not only its financial statements but also the way in which decisions are arrived at. It must also share its responses to environmental and social consensus with its shareholders.

40. Equity
Transparency means sharing not only successes but also failures. Such sharing is not possible unless financial rewards are distributed equitably. The benefits must be divided not among the few but many. Creation of wealth must aim at removing inequalities and inequities.

41. Accountability, probity and integrity
Corporate citizenship is about improved accountability, probity and integrity. The business must aim to bring benefit to all and demonstrate it through regular audits of the organisation’s financial, environmental, social and economic processes.

42. Inclusivity
Corporate citizenship is about employee and stakeholder-inclusivity. Stakeholder inclusion requires a long-term, and continuous relationship to be developed with all stakeholders both inside and outside the corporation.

43. Diversity
Diversity has been regarded as dysfunctional throughout our economic history. It is extremely valuable in the board. It is only through the clashing of opposite ideas that the true reality emerges and real progress takes place. A lot of our national ills can be solved only if we recognize that its is the difference and not conformity that makes harmonious society.

44. Engagement
Corporate citizenship is about engaging with changing and diverse cultures - corporate, government, community and individual - in order to achieve sustainable social, environmental and economic success.

45. Dialogue
Open dialogue is at the heart of corporate citizenship. With wrenching change taking place all around us the corporation has to develop systems of regular communication within the board & between the board, shareholders, management, government, employees, custom, suppliers and the civil society. It is through this dialogue that the corporation will communicate its values, vision, mission and goals and share their financial, environmental and social numbers at regular intervals. It must demonstrate corporation’s commitment to all it’s constituents viz. the board of directors, management, employees, shareholders, the government and the other stakeholders and the civil society. Corporations must clarify that they are not only creating value for the corporations but making significant impact on the society by reshaping community values, attitudes and cultures.

46. Corporate scandals and the consequent collapses have a lethal effect on the poor and the old. Not only these destroy their life’s savings and reduces them to penury they take away their confidence in the markets itself. They have no hope to make good their loss. It is a great national loss. We have to do something, therefore, to prevent them happening again. But revising codes of corporate governance is certainly not the answer. We have a great capacity to beat the codes. Andersen have asserted all along that whatever they did at ENRON or WORLD.COM was within the law and thousands of firms do the same. Again nothing that President Bush has said in the aftermath of so many accounting scandals is new. Plastering over the capitalism’s cracks simply won’t work. It needs a systemic change which will come only by looking inside and not from outside. It is we who have to change our paradigm from individualism to integration, from tangibles to intangibles, from capital to knowledge, from objects to relationship, from parts to the whole, from domination to partnership, from structures to process, from short termism to long termism, from growth to sustainability, from confrontation to collaboration and from covering up failures to owning them up.

47. As we move into the 21st century there is a growing recognition that the ultimate goal of economic effort ought to be to improve the quality of life. Money is not a measure of all things that make us happy and markets are not the best mechanism to enhance human happiness. Indeed, if completely unfettered, they can do the opposite by encouraging selfish behaviour. Our focus should not be only on financial capital but also the human capital, intellectual capital and environmental capital. Good Corporate Governance must aim on maximising the value of all capital.

48. It is unfortunate that our economic structures are built on an inaccurate view of the human pscyche. Scientists have recently discovered that the small, brave act of cooperating with one another, of choosing trust over cynicism, generosity over meanness, altruism over selfishness makes the brain light up with quiet joy. Experiments conducted on young women engaged in cooperative effort showed that longer they engaged in cooperative strategies, stronger were the blood flows to the pathways of pleasure. Obviously our effort should be to increase opportunities of cooperation and down play unbridled competition.

49. We need to think of business designs that go beyond the externalities of quarterly profits and provide intrinsic worth and meaning to shareholders while making corporations focus on the larger picture and helping to relish the joy of making a difference. Alas, it may take many more scandals to move to such a radical solution but since the alternative is so grave it might be worthwhile to steer the debate in this direction.

50. I am honoured to have been invited to deliver the Annual Oration on Corporate Governance A Road Map to Achieve Corporate & Professional Excellence. I am conscious of the fact that I owe this honour to the magnanimity of my greatest mentor and inspiration one of world’s finest legal brains and the most admirable human being - His Lordship Justice Venkatchaliah. Sir, my deepest gratitude to you for bestowing the honour.

51. The Institute of Chartered Accountants of India is a repository of India’s most exquisite financial gemstones, and therefore, there is nothing more daunting than to speak to such a distinguished audience as yourselves.

52. I compliment the Institute for the choice of the topic. Role of Corporate Governance has never been more vital. It is not just because of Enron or the UTI. The debate about corporate governance is taking place all over the world. During the past one month I have visited UK, US, Germany, Netherlands, Italy, Canada, Russia and the Middle East. Corporates and governments everywhere are seized with this topic and hoping this will help them attract foreign investment. In fact the issue of Corporate Governance is much more important than simply getting international investment. The need and demand for high standards of governance, ethics and environmental and social responsibility are the key aspects of globalization debate. They do not affect just the big business or institutions concerned with financial investment. They concern all of us. The Issues of transparency, accountability, equity, integrity, probity, responsibility and sustainability are instruments of not only ‘corporates excellence’ but also ‘professional excellence’. Hence, I shall be taking both the issues together.

53. In India we have often been blamed for having a myopic view. We believe that high profile failures are a part of only India’s system. But as you all know the amount of shareholder’s wealth that Enron succeeded in destroying is far more than the loss due to any single scam in India. When the US President uses a State of the Nation address to speak about accounting standards, as he did last week, the issue has got to be on top of the national agenda. Even the UK, which already has conducted half a dozen reviews on this subject, its Secretary of State announced further review of how the Boards are constituted and how they ought to operate.

54. I have been fortunate in being involved in a conference on Corporate Governance which World Council For Corporate Governance in association with IOD in India and the Centre for Corporate Governance organized soon after ENRONITIS, a couple of months ago under the guidance of Justice M N Venkatchaliah. We had the benefit of some of the best legal brains of the country such as Justice A M Ahmadi, P Chidambaram, Padmabhushan K K Venugopal, Kapil Sibal and Dr A M Singhvi. It came out with some very significant recommendations that can have far reaching impact on corporate governance developments worldwide.

55. The conference participants felt Corporations must recognize that globalization offers them both the strength and opportunity to usher in a just and conflict free world for their own security, survival and sustainability. The scope of Corporate Governance should be enlarged to encompass Good Governance in all its aspects taking cognizance of the political, administrative, economic, social and judicial environment in which they function. Board of Directors ought to balance the interests of capital providers with those of other stakeholders and aim for a long term and sustained business success. Good Corporate Governance ought to create value for all stakeholders including society at large. It was also felt that there is a need for stricter internal audit controls to ensure that debacles such as that of ENRON do not recur. There needs to be greater scrutiny of the role of Chairman & CEO by the Board of Directors. The role of Chairman and CEO must be separated. There should be clear separation of the Audit and consultancy function. These should not be done by the same organisation. There is a need for economic costs to reflect full ecological costs. Accounting practices need to ensure that environmental costs are properly internalized with business. Corporate Governance ought to cover disclosures on Environmental and Social responsibility. Sustainability ought to be the end game of business. No business activity is undertaken or permitted that jeopardizes the ability of future generations to meet their own needs.

56. The ‘role of non-financial capital’ such as ‘human capital’, ‘social capital’ and ‘cultural capital’ was particularly emphasized. It was felt that there needs to be a greater recognition of the importance of ‘intellectual and reputational capital’ and the tectonic shift in public values with the onset of knowledge economy.

57. A primary goal of good corporate governance ought to be to foster a culture of creativity, innovation and entrepreneurship to protect the business from irrelevance and obsolescence. It should aim to leverage the intellectual capital to serve the unarticulated customers and untapped markets.

58. To strengthen Boards of Directors and in order to induct people of eminence and ability into the Boards to discharge the functions as watch dog of other stakeholders’ interests on Audit Committee, on Remuneration Committee etc., these people should be insulated from the failings of the day to - day management. Non-Executive Directors should be freed from accountability for failures such as a cheque bouncing or a pollution device failing. Amendments in the laws and Rules & Regulations in this regard should be made.

59. It is unpractical and unethical to hold non-executive Directorship or Directorship in ten and more companies. The rules for Directorships need to be amended so that the number of non-executive directorship a person can hold is less then ten.

60. It is vital that a Minimal Training Programme should be designed and administered for all Directors, both Executive and Non-executive, covering key aspects of good corporate governance and directorial responsibilities - statutory, environmental and social. There should be a compulsory induction programme for institutional nominees.

61. The most important aspect in Corporate Governance is the effectiveness of the boards. Cadbury Report was emphatic about the quality of the Board. It says,

62. The country’s economy depends on the drive and efficiency of its companies. Thus the effectiveness with which their boards discharge their responsibilities determines Britain’s competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance.

63. In the UK, the Company Boards are a mix of ‘executive directors’, ‘non-executive directors’ and 'independent directors’. The difference between the latter two is that both are non-executives but the independent directors have, or represent, no financial stake in the business.

64. I will refer to both categories of non-executives as the "independents" for the rest of my talk for convenience. The distinction between the executive directors and the independents is two-fold: firstly the former are employed, normally on a full-time basis, to run the business, whereas the independent directors aren't; and secondly the independents get paid very much less. In a big company it’s typically about 10% of what their executive colleagues get. As far as the law is concerned, as far the Stock Exchange is concerned, they are all simply ‘directors'. They carry equal responsibility for the business, they have the same fiduciary responsibilities, carry the same obligations, and face the same personal liability.

65. The UK system ensures that the independent directors are closer to the action; they are present when the key decisions are made; they help shape strategy; they are able to question the top executives directly; and they can observe how well the latter function as a team.

66. Independent directors have certain specific roles. They invariably chair, and usually dominate, two key committees: audit and risk, and remuneration.

67. One characteristic you will find in almost every business that has gone off-track is the dominance of the board by a single overbearing individual. Chairing the Board and heading-up the management team are also different roles, usually calling for quite different capabilities. Therefore, the Combined Code of good governance in the UK requires the Chairman's role to be separate from that of the Chief Executive. I think that is a wholly appropriate distinction.

68. Aside from the structure of the Board, another aspect of good governance is the fullness and quality of its reporting. The reporting requirements for companies are, of course, both specific and in some ways quite onerous-designed to inform the world, and especially the shareholders, exactly where the company stands and how it is performing. These are even more demanding if the company is listed on the Stock Exchange.

69. To ensure full and accurate reporting the company is, of course, required to have its accounts audited. This adds to the pressure on the Directors rather than alleviates them. As Andersen has recently been at pains to point out, it is the Board that signs off the accounts and issues the annual report, not the auditors.

70. UK’s system of Corporate Governance has been progressively developed over the years, and in the last 10 years subject to a series of reviews. Cadbury, Greenbury, Hampel, the Combined Code, Turnbull and now the Myners Review. In 1998 London Stock Exchange published The principles of Good Governance and Code of Best Practice, commonly called the Combined Code following consultations on the final report of the Hampel Committee published the previous January. The Hampel Committee was established in November 1995 to review the Cadbury and Greenbury Committee reports. The combined Code requires listed companies to report compliance with the following provision:

The board must meet regularly.
The board should have a formal schedule of matters specifically reserved to it for decision.
There should be a procedure agreed by the board for directors in the furtherance of their duties to take independent professional advice if necessary, at the company’s expense.
All directors should have access to the advice and services of the company secretary, who is responsible to the board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of the company secretary should be a matter for the board as a whole.
All directors should bring an independent judgement to bear on issues of strategy, performance, resources (including key appointments) and standards of conduct.
Every director should receive appropriate training on the first occasion that he or she is appointed to the board of a listed company, and subsequently as necessary.

71. These issues have been dealt with in India on similar lines in Kumar Mangalam Birla’s Report which has been adopted as SEBI Guidelines. The Centre for Corporate Governance has published its own Guidelines which cover environmental reporting in addition to financial reporting. All this sounds solid. So, where is the real problem?

72. The issue essentially comes down to the quality of the Board, how well it is chaired, the choice of directors and how far they understand their role and how well they are able to discharge it effectively. It also depends, on how far and how well the shareholders, principally in the form of the large institutional investors, play their part.

73. The key role of the independents is to ensure that the Board functions well. They are not there to manage the business, but to ensure that the business is well managed.

74. A prerequisite for this is to get the right people on the board and train them. I know what directors feel about training. They all think they know what needs to be known. But independent directors are different. They know little about the company. Their value lies in the diversity of their viewpoint. But, they must know how it should be put across effectively. It needs special skills. It is a tragedy that we have little training on one of our most important need of communication.

75. There is a general belief that director appointments are all incestuous, with the directors of the big companies sitting on each others boards. Too many directors are still chosen for their name, or reputation, rather than for what they bring to the Board. I would recommend that directors are recruited through independent search firms, rather than through personal contacts.

76. In trying to recruit directors we ought to cast the net much more widely. Greatest value accrues from people from different disciplines, academic backgrounds, social strata, ethnic and religious beliefs, age and gender. I would look to professional bodies such as yours, apart from the business, the public sector and for all but the biggest organisations to top-level executives who are one step below board level in larger organisations.

77. I would also like to see far more done to education and development of directors. Here the Centre for Corporate Governance, which the World Council For Corporate Governance has helped establish with the Institute of Directors in India, has developed a 12 Module programme especially over 40 hours, which we believe should be the best for any corporate director.

78. Being an independent director is not as cushy as just turning up for a meeting each month, stay in 5 Star Hotels, dine at the best restaurant and collect your cheque at the end, as many imagine it to be. You need time to read valuable paper work that is prepared for each meeting and be available for consultation when things go wrong specially when a company starts projecting badly. You would not envy the job of the directors of ENRON today.

79. In the wake of Enron a number of ideas have been suggested, some new, some old, for improving corporate governance, both in UK and in the United States. Some are worth exploring.

80. The Myners review has focused on the role of the institutional investors, and suggested that an annual meeting with the independent directors would be a useful additional insight into the business.

81. It has also been recommeded that auditors should not be allowed to sell consultancy services to the same client, or perhaps that the former should not offer other services at all. This is also a point that the 2nd ICCG held in Mumbai in January 2002 has adopted.

82. It is also important that companies should spell out their risks in more details in the annual report. Here we would need to strike a balance and be very cautious. Many of those risks are a matter of commercial confidentiality and you may not like to share these with your competitors. You have to, therefore communicate your concerns effectively to your shareholders.

83. On the subject of pay, it has already been suggested that the remuneration policy should be explained and put to the shareholders each year.

84. As the Enron debacle indicates, a good corporate governance code is no guarantee of good corporate governance. There needs to be stricter monitoring and enforcement of laws on punishment for corporate scams to ensure that those who violate the public trust do not go scot-free. Along with a requirement of disclosures and accountability, laws should be amended to mete out swift and deterrent punishment to the offenders. Here one would endorse George Bush’s message in his State of the Nation address:

85. Executives who profit from false financial statements may be required to repay bonuses or other pay if accounts are subsequently restated as a result of misconduct. Executives who abuse their position may be disqualified from holding future corporate roles.

86. The cases such as Enron and many others are not just breach of codes but violations of the law. In which case, one would like to see vigorous prosecution pursued, but let’s not assume that it is the law alone which is going to bring about the high standard of governance we seek. Good governance, is not simply a matter of structures and procedures: The last thing one wants is a ‘tick in the box’ attitude to the whole subject. It depends on the ethics of the people overseeing and running the enterprise. On having a fundamental sense of what is right and what is wrong, a belief in their honesty for its own sake and a sense of personal responsibility.

87. Role of Ethics

88. Ethics tend to be something that pervades our organisation’s total culture. You don’t get unethical boards running ethical companies, or vice versa. However, barring a few villains, the question of ethics is not always straightforward. Situations are not black and white, they’re usually grey. The ethical dimension is not always apparent; or if it is, there are conflicting sides to the argument: not in terms of whether to make the right ethical decision or not, but what is the right ethical decision.

89. Good Governance is not simply about corporate excellence. It’s the key to economic and social transformation. The corporations of today are no longer sheer economic entities. These are the engines of economic and social transformation. Kenichi Ohmae argued in ‘The Borderless World: Power and Strategy in the Interlinked Economy’ that:

90. A Corporation is a social institution whose responsibilities extend far beyond the well being of its equity owners to giving security and a good life to its employees, dealers, customers, vendors, and subcontractors. Their whole life hinges on the wellbeing of the corporation.

91. Corporations are the powerhouses that generate employment, provide education and health care, and give sustenance to the society. Globalization has given multinationals overwhelming power at the expenses of democratically elected governments. Good governance needs to ensure that the corporations take in to account the interests of all constituencies in which they operate. A business entreprise’s corporate actions must be compatible with long term societal needs such as the quality of environment and welfare of local community. It has been increasingly demonstrated that the ultimate competitiveness and corporate success is dependent as much on investors, employees, customers, creditors and suppliers as on shareholders.

92. Morphing of industrial economy into knowledge economy has created a tectonic shift in public values. Companies can ignore this shift only at their own peril. Public hostility faced by Shell, Nike, Reebok, Ikea and Monsanto should provide lessons to corporations who violate the social license and show lack of environmental responsibility. In today’s market, successful companies will be those that recognize they have responsibilities to the society, the community and the planet that go beyond compliance with law. In a study carried out by Wheeler and Seelampaa quoted in their book called The Stakeholder Corporation: A Blue print for Maximizing Stakeholders Values (1997), they asserted that during most of the 20th century in the UK and USA, stakeholder inclusive enterprises fared better than shareholders first companies. Stakeholder inclusive corporations invariably lead to better long term business performance.

93. Harnessing the full potential of knowledge economy requires understanding of how knowledge works. Sharing of capital or physical assets does not increase the total value to society. Sharing of knowledge, on the other hand, adds value to both sides. Knowledge behaves entirely differently from capital. Capital consists of tangible assets (buildings, plant, land etc.) that are limited and can be used for only one purpose. But knowledge is a fluid, intangible asset that can be transferred at little cost. Its value increases when shared. This insight explains why collaboration between the corporation and its stakeholders can be beneficial to both sides. The end result is not one plus one equals two, but much more.

94. Good governance of corporations is a source of competitive advantage and critical to economic and social progress. It not only attracts long term patient foreign capital but also helps to broaden and deepen local markets.

95. It must be remembered that the biggest brunt of poor Corporate Governance practices is borne by the poor. Corporate scams can set back social and economic gains by as much as a generation. Similarly good governance can have a transformational effect on the life of poor, especially in developing and transition economies. A healthy growth of competitive corporate governance is fundamental for sustained and shared growth sustained in the sense that it withstands the shocks of market volatility; shared in the sense that it delivers benefits to all of society. Poverty persists because the gains of growth are not equitably distributed.

96. There are many definitions of Corporate Governance. The classical view is that its main purpose is to define relationship between those who own the capital and those who control it. This is a narrow definition. The end purpose of Corporate Governance must be to maximize company’s value. Unfortunately for far too long this value has been determined only by the financial value. It has now been realized that the financial value depicts merely a small percentage of the total value. The value of human capital and natural capital is infinitely more than the value of financial capital. Admittedly there are problems in calculating the cost or value of human capital, cultural capital or natural capital. This by no means suggests we can ignore it. Specially now that we find that our progress is not being limited so much by the financial capital but the human and natural capital.

97. It has been estimated that the value of biological services flowing from natural capital is around $36 trillion annually. Capitalizing it on the basis of current return on capital gives a capitalized monetary value of world’s natural capital at about $500 trillion. Compared to this, the World’s gross product is only $39 trillions. Similarly the World Bank’s 1995 Wealth Index found the total value of human capital to be three times greater than all financial and manufactured capital reflected in global balance sheets. This is a conservative estimate as it counts only the market value of human employment, not uncompensated effort or cultural capital.

98. The true purpose of corporate governance is to maximize creation of company’s total value. The social and environmental issues, therefore, are equally important in any corporate governance debate. There is a need, therefore, for corporations to disclose their environmental & social performance.

99. Business has to take on the responsibility of upgrading the environment. Society will not gain if financial capital increases at the cost of natural capital. We have to create new production and distribution processes to reverse the loss of natural capital and eventually increase its supply. This will involve more than product design, more than marketing and competition. It will mean a fundamental redesign of business models, its roles and responsibilities.

100. We have to question how did we come to create an economic system which is so contrary to natures biological processes and is based primarily on extraction, depletion, waste and disposal. How did we create an economic system that confuses the capital liquidation with income? How is it that our pricing system tells us it is cheaper to destroy the earth than to conserve it? Is it normal to have an economic system that discounts the future and sells of the past? Wasting scarce natural resources to achieve immediate profits does not lead to value creation and wasting environment to achieve economic growth is neither economic nor growth.

101. Corporate governance framework has to be established on the simple proposition that all capital be valued. While it may be difficult to value a forest, a river, grassland or a mountain, it is wrong to give it no value at all. Ask how much will it cost to make a 700 year old tree or new atmosphere or a new culture? It is you who as professionals have to determine the methodology of replacement cost.

102. Today’s business faces multitude of challenges, increasing business pressure on all fronts, globalization, shorter product life cycles, internet, over capacity, complex regulations, currency volatility, value migration etc. Meeting these challenges will bring about economic discontinuities that are unprecedented in rate and scope, and would require highly innovative approaches. We have to leapfrog over existing technologies rather than incrementally improve them. Using Nicholas Negroponte’s expression for the times that we are living incrementalism is our worst enemy. But innovation will bring tremendous resistance from vested interest. One only has to refer to Jim Utterback’s (An MIT Professor) case studies of pressures on electric companies brought by gas lighting companies in the 1880s, recorded in his book Mastering the Dynamics of Innovation. To understand how hard it is to resist change. This is the Board’s number one job in today’s economy which is driven by innovation.

103. Corporate Governance is concerned with empowering people, spurring and pursuing innovation and improving efficiency. It also addresses conflicts of interest which can impose burdens on the enterprise. Ensuring transparency and probity in corporate affairs can make a major contribution to improving business standards, public accountability and consequently increase its market capitalization.

104. We are on the threshold of a profound transformation. The gap between what can be imagined and what can be achieved could never have been smaller. The key constraint to achieving our ambitions is no larger the financial capital. It is the limitation of our own imagination and attitude. Our governance systems whether in public or corporate must foster innovation, nurture creativity and build trust, transparency and a sense of sharing. We must recognize that we are living today not in an economy of hands or heads but the economy of hearts. Our governance systems need to be recast in a way that they touch the hearts and not only the minds.

105. The greatest challenge facing the accountancy profession today is the determination of the true costs. Market economy cannot function effectively without internalizing costs of each input. Environment is a key input in the creation of wealth. Shattering of a huge ice shelf Larsen B weighing 500 million billion tonnes in Antarctica a few days ago is a sharp reminder of the cost of industrial activity on environment. Counting what is not easily countable is the greatest challenge of your profession. For globalization to succeed prices must tell the economic truth. Socialism collapsed because it concealed the economic truth. Capitalism will collapse if it does not allow prices to tell the ecological and social truth. Pursuit of good corporate governance framework therefore, has to take care of a triple bottom line approach i.e. it must look after profits, people and planet.