The document outlines the historical foundations and renewed interest in corporate governance in the 1990s. It discusses key developments like the Berle and Means study on separation of ownership and control in corporations. International standards like the OECD Principles promote transparency, shareholder rights, equitable treatment, and board responsibilities. Adopting good corporate governance can benefit companies through improved valuation, access to capital, lower costs, and higher efficiency.

1. CRF – 2012 : Control to Self Regulation
Corporate Governance & CSR
By
Y.R.K. Reddy
yrk@academyofcg.org
www.academyofcg.org
February 15th 2012
1
© Academy of Corporate Governance

2. Objectives of the Session
 A: Review of the key developments leading to revived
interest in corporate governance; the current framework of
assumptions; the OECD standards; the assumed benefits and
business case; the broad shortcomings in Emerging Market
Economies; the potential role of company registrars in
promoting corporate governance.
 B: Developments leading to the current logic for CSR; the
international standard relating to stakeholders; leading
approaches and bench marks; the dynamics; the potential for
strategic CSR - key examples, whether Registrars have a role
in promoting.
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3. PART – A
Corporate Governance – Historical
Foundations
“ … The Directors of such companies, however, being the managers
rather of other peoples` money than of their own, it cannot well be
expected, that they should watch over it with the same anxious
vigilance with which the partners in a private copartnery frequently
watch over their own …. Negligence and profusion, therefore, must
always prevail, more or less in the management of the affairs of such
a company”, 1776.
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4.  The focus on control in corporations: Berle & Means Studied the
modern corporation & debated the dynamics of “ownership” and
“control” in 1932 in the context of the USA.
 There are severe apprehensions about control and what it can mean to
Institutional investors and minority shareholders, in case of block
holders participating in management and the SOEs.
 Hope that risks would be abated if internal structure and processes
and external institutions get developed – reducing information
asymmetry and promoting attendant rationality.
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5. Renewed Interest in 90`s
The logic for robust financial statements – Cadbury.
 The AFC & Greenspan–Summers – IMF arguments.
 Revolving around “Crony Capitalism” due to financial sector
weaknesses (combination of inadequate capitalization &
supervision of banks combined with excessive leverage &
guarantee + directed lending).
 Competitive capitalist / market assumptions with weak structures –
“the Asian way” with cross holdings, large number of subsidiaries,
lack of transparency, collusion between corporations, financial
institutions and governments etc.
 Weaknesses in equity market development, IFRS / FASB
standards, information disclosure, oversight by independent
directors, bankruptcy laws.
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6. The International Convergence on Corporate
Governance
 Corporate Governance is one of the 12 key standards
promoted by Financial Stability Forum (now Financial
Stability Board).
 IMF - World Bank, The Report on Observance of
Standards and Codes (ROSC), OECD, BIS, regional and
national agendas…..
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7. GFC & the Current Debate
 Financial crises are historical – followed by State
intervention. (the cycle).
 Several studies including the UN Commission, OECD,
GFSR, ICGN, FCIC etc.
 Mainly argue for appropriate regulation / intense supervision;
greater transparency and disclosure norms; early action from the
State; public policy / plans for impaired assets; balance sheet
repairs – consistency of treatment etc. at policy level ( along with
some multi-lateral moves)
 At the enterprise level, the emphasis has been on advanced / robust
/ comprehensive risk management and qualified board oversight
and activism; compensation / incentive structure that do not
encourage false / fleeting profits and risks.
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8. OECD Principles as Global Standard
I. Ensuring the Basis for an Effective Corporate
Governance Framework
The corporate governance framework should promote transparent and
efficient markets, be consistent with the rule of law and clearly articulate
the division of responsibilities among different supervisory, regulatory
and enforcement authorities.
II. The Rights of Shareholders and Key Ownership
Functions
The corporate governance framework should protect and facilitate the
exercise of shareholders’ rights.
III. The Equitable Treatment of Shareholders
The corporate governance framework should ensure the equitable
treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain
effective redress for violation of their rights.
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9. IV. The Role of Stakeholders in Corporate Governance
The corporate governance framework should recognize the rights of
stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders in
creating wealth, jobs, and the sustainability of financially sound
enterprises.
V. Disclosure and Transparency
The corporate governance framework should ensure that timely and
accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership,
and governance of the company.
VI. The Responsibilities of the Board
The corporate governance framework should ensure the strategic
guidance of the company, the effective monitoring of management by the
board, and the board’s accountability to the company and the
shareholders.
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10. The Universal Principles
Accountability Fairness Transparency Responsibility
These Principles should:
Ensure mgmt.’s Protect Ensure timely Recognize the
accountability to Shareholders and accurate legal rights of
the board & rights; treat all disclosure on all stakeholders &
board’s equitably; material matters promote
accountability to provide sustainable
shareholders redress. development
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11. Modern corporations are disciplined by
internal and external factors
(Source: Corporate Governance Framework, Nadereh Chamlou, Magdi Iskande, World Bank)
Internal External
Shareholders Private Regulatory
Stakeholders Standards
(for example, accounting
Board of Directors and auditing)
Laws and
Appoints Reputational agents1 regulations
and
Reports to
monitors •Accounts
•Lawyers Financial Sector
•Credit Rating •Debt
Management •Investment Bankers •Equity
•Financial media
Operates •Investment advisors Markets
•Research •Competitive factor and
•Corporate Governance product markets
Core functions Analysis •Foreign direct investment
•Corporate control
1Reputationalagents refer to private sector agents, self-regulating bodies, the media, and civic society that
reduce information asymmetry, improve the monitoring of firms, and shed light on opportunistic behaviour
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12. Possible benefits to companies
 Many studies have shown positive benefits. Eg: those of Mc Kinsey, ABI and
IMF working paper on CGQ & CLSA studies and the subsequent ones………
 Recap: Other compilations had shown following benefits in earlier years:
 Improves Valuation of Assets
- Share premium 22% to 30% as per Mc Kinsey survey; 700 – fold increase
in firm value in Russia (21 firms)
 Improves Access to Capital
- CG a major factor for competitive provision of finance; access to IFI’s.
 Lowers the Cost of Capital
- CG helps in finer rates. Eg: Romania’s BCR
 Improves Efficiency
- ABN Amro study in Brazil shows 20% higher P / E ratios; 45% higher
ROEs and 76% higher net margins. Deutsche Bank study of S & P 500 shows
out performance by 19% over two years; Harvard / Wharton study shows
abnormal returns of 8.5%; CLSA study of 100 companies shows 8% points
higher EVA;
 Other benefits
- reduced risks – improves the reputation and trust ; increases
competitiveness.
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13. The old idea of CG Premium that continues to
make business sense….
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14. One perspective as to where Asia stands in CG ……
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15. An FII’s compilation on other relevant institutions…..
Source: F & C Investments
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16. Regulatory Approaches
Two Most Popular Typologies:
 Principle based – Comply / Apply or Explain ( and justify).
 Rule based, regulated / legislated and well enforced.
Newer / emerging hybrid versions:
 “Comply or Explain” but in legal and regulatory guidance.
 Mostly principle-based but one or two strongly rule based,
regulated but fully enforced.
 Rule based, regulated / legislated but weakly enforced by
intention.
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17. Role of Company Registrars
 Regulation – entry, as going concerns, exit facilitations.
 The tradeoff between hard nosed regulation / enforcement
vs. market discipline.
 Is there a role for campaigns / reputation intermediation?
 Any other experiences?
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18. PART – B
CSR – A Part of Cluster Concepts
 Corporate Social responsibility, corporate citizenship,
responsible business, stakeholder engagement etc. are cluster
concept: Often fuzzy and overlapping; policy as well as action
oriented.
 The political economy of CSR can be traced to:
 Beginnings mainly in the 50’s.
 Much controversy during the 70’s (strength of collectives; Milton
Freidman’s perspective).
 Strong shift to customers as key stakeholders during the 80’s (issue of
competition & competitive strategy for survival);
 Tilt to providers of finance and policy regimes in the 90’s (importance
of finance; liberalization)
 The upsurge of sustainability issues in current times ……
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19. CSR and Other Responsibilities –
The Challenge of Exclusive to Inclusive Perspective
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20. OECD Principles of Corporate Governance
– What does the Global Standard Say?
– The Role of Stakeholders in Corporate
Governance
“The Corporate Governance framework should recognize
the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation
between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financial sound
enterprises”.
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21.  The rights of stakeholders that are established by law or through
mutual agreements are to be respected.
 Where stakeholders interests are protected by law, stakeholders
should have the opportunity to obtain effective redress for violation of
their rights.
 Performance-enhancing mechanisms for employee participation
should be permitted to develop.
 Where stakeholders participate in the corporate governance process,
they should have access to rely an, sufficient and reliable information
on a timely and regular basis.
 Stakeholders, including individual employees and their representative
bodies, should be able to freely communicate their concerns about
illegal or unethical practices to the board and their rights should not
be compromised for doing this.
 The corporate governance framework should be complemented by an
effective, efficient insolvency framework and by effective
enforcement of creditor rights.
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22. The Idea of a Stakeholder:
 Popular definition:
“A stakeholder is any group or individual who can
affect, or is affected by, the achievement of an
organization's objective”
Freeman, 1984
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23. In the context of Corporate Governance
“ A stakeholder is any institution, group or
individual who can get benefited or affected by,
and/or can benefit or adversely affect, a
corporation`s actions in pursuit of its primary
objectives”
Y.R.K. Reddy, Presentation at OECD meet, Cebu, 2007.
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24. Available Leads for CSR / Stakeholder
Engagement
 Several guidelines, case studies, international standards for
assessment / reporting – especially as part of CSR
(Stakeholder engagement may be larger than CSR).
 Noteworthy: IFCs Stakeholder Engagement – good practice
manual; IFCs EHS guidelines; OECD`s guidelines for
MNEs; Dow Jones Sustainability Index, FTSE4Good Index,
SA 8000 / 14000, AA1000, GRI et al + principles such as
Caux.
 ISO 26000 adopted in September 2010
A World by itself!
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25. Ex: Stakeholder Map. A steel SOE
Banks & Model Villages Ad Agencies
Industry Financial -Brand Ambassadors
Associations Institutions Certifying/rating bodies ,Celebrity Employees
Parliament
Distribution Public (COPLI++) Consultants/ Specialist Advisory-
Logistics Deposit Holders National& International
Auditors Shareholders-Government,
Distribution
Institutions, Ministry of HI&PE
Channels General Public
Other Central Govt
Bodies/Laws Subsidiaries Direct Employees
Retirees
Direct Suppliers Direct Customers & Families
State Govts. (Legislature,
Domestic/International Joint
Laws, Compliances
CAG
Unions Ventures
Employee Ministry of Steel & Mines
Cooperatives Indirect Employees
(Contract and
Ministry of Finance CVC Other Labour)
Indirect Customers
Families of Employees – Townships – Hospitals
NGOs -Community CentresSchools, Colleges, Miscellaneous
Technical Institutes
Neighborhood-
environment/Infrastructure
Implications for CSR??
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26. Dynamics of stickiness, capture, direction
and the need for close analysis
Involve “Partner”
High
POWER
Monitor with Keep
minimum effort.
Informed
Low
Low INTEREST High
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27. Towards Strategic CSR / CSV – the Many
Success Stories
•Powerful ideas (ex. Michael Porter et al, 2002, 2006, 2011).
Even more powerful examples. ( Nestle, Jain irrigation, ITC, DRL……).
The power of coalition with INGOs. ( Ex: Aide et Actions’ innovative
engagement with corporates; the initiatives of several SOEs in India. ).
Key steps: close analysis, explicit policy, detailed planning,
partnerships, execution, reporting.
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28. Firm Infrastructure
(e.g. financing, planning, investor relations)
Human Resource Management
(e.g. recruiting, training, compensation system)
Technology Department
(e.g. product design, testing, process design, material research, market research)
Procurement
(e.g. components, machinery, advertising & services)
Inbound Operations Outbound Marketing & After Sales
Logistics Logistics Sales Service
(e.g. incoming (e.g.
material assembly, (e.g. order (e.g. sales (e.g.
storage, data component processing, force, installation
collection, fabrication, warehousing, promotion, customer
service branch report advertising support
customer operations) presentation) proposal complaint
access) writing, web resolution
site) report)
Adapted from Porter & Kramer – Strategy and Society, HBR December 2006
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29. Some Current Policy Steps in India – Do they
need International Best Practices?
 “The guidelines for Corporate Social Responsibilities for
Central Public Sector Enterprises”. Key concerns in
reviving old debates on objectives, level playing field and
control shift.
 The proposed Companies Law Bill and the approach to
mandating CSR – the policy implications of governance, tax
levies and their adverse impact on market forces / discipline.
 “The National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business”.
What role can Registrars of Companies play?
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30. Some Challenges
 The lack of unitary standards and multiplicity of reputation
agents.
 Lack of standards in accounting, reporting and disclosure.
 The difficulty in recognizing the risks associated with CSR
and their second-order trades-off with strategy.
 Others – drawing from international experiences?
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