World Council for Corporate Governance

Despite Sarbanes, Spitzer and Sir Derek there has been no remission for shareholders from the CEOs having their hands in the corporate tills on both sides of the Atlantic during the year 2003. If it is not the outright frauds like Parmalat or Skandia, it is the crafty compensations a la Hollinger and Conrad Black. The malady seems so deep that no code seems to help. Perhaps it is time to look afresh at the purpose of corporate governance.

Corporate governance is often defined as a blend of laws, policy and practice aimed to maximise shareholders returns. The question is why should it maximise shareholders return. The implication is that shareholders are the owners of the enterprises. Is that true? Are shareholders the real owners of the business? In the year 2003, US shareholders held their stock for just about 6 months. 25 years ago shareholders kept their stock for an average of five years. Further, due to most of the investment going through mutual funds, half the investors do not even know the companies in which they hold stock. In such a situation can they really be called owners?

In any event, these shareholders certainly do not behave really like owners. A true entrepreneur will be deeply interested in the long term growth of the company. He/She may not like to declare any dividend and concentrate on growth by ploughing back all the company profit in the business. This runs against the expectations of the shareholders. This is happening in Kodak. Large shareholders of Kodak are battling with the company against its strategy to move from an analogue to a digital future. The company needed investment for this transformation and so cut back on dividends incurring the wrath of shareholders. Clearly shareholders are not interested in the long term growth of their companies. They have turned predators and speculators. Personal greed is their only creed. Today's stock markets are driven only
by short term goals. On the eve of 2004, can we make a resolve to change the dominant paradigm of the market from creating value for the shareholders to creating value for the company?

Writing in the Wall Street Journal recently, Bill George, former CEO of Medtronics, a leading medical technology company in the US, blamed the short term expectations of Wall Street for the unethical conduct of CEOs in inflating performance and earnings. Medtronics is one company, which for a long time has focused on its mission of creating long term value for its customers. Theirs is a classic example of how a company nurtures innovation. 70% of their revenue comes from the products launched during last 2 years. Their sharp focus in anticipating customer needs enables them, to remain ahead of the market. This bears a sharp contrast to some CEOs who have been claiming that their focus is not on customer's but shareholder's needs. No wonder that there exists a mismatch between shareholders expectations and customer aspirations. Such CEO's can neither create value for shareholders nor customers and are bound to fail their companies.

One of our most important challenges in 2004 is to make our investors realise the folly of their short term goals. These may benefit crafty speculators but can ruin the market confidence and decimate small investors. Investor training therefore, is an important area of immediate action. Companies cannot create long term value without putting "customers first" as their superordinate goal. Medtronics has demonstrated a steady improvement in business performance with revenue and earnings increasing consistently during 64 consecutive quarters. It is time we realised that the true goal of corporate governance is not managing earnings but creating value. We need to go back to the age-old formulae of bottomline improvements and customer focus. The alternative of sophisticated jugglery through financial engineering and book cooking spells disaster.