This document discusses corporate governance and its relationship to company performance. It begins by defining corporate governance and listing some key issues related to it, such as asymmetry of power and information between shareholders and management. It then notes that current status of corporate governance involves an overemphasis on structure over substance and regulatory overreach. A comparison is made between board structures of Indian and US companies. The document argues that good governance leads to better long-term performance by improving transparency, decision-making and risk management. However, governance alone does not ensure performance and there may be a time lag between implementing better governance and seeing performance improvements. It concludes by stating that companies should invest in governance to boost returns.

1. Corporate governance -
Performance and Measurement
T.V.Mohandas Pai
Member of the Board and CFO
Infosys Technologies Limited

2. Corporate Governance
A system of checks and balances between the
board, management and investors to produce an
efficiently functioning corporation, ideally geared
to produce long-term value
 The Conference Board

3. Issues in Corporate Governance
 Asymmetry of power
 Asymmetry of information
 Interests of shareholders as residual owners
 Role of owner management
 Theory of separation of powers
 Division of corporate pie among stakeholders

4. Current status on corporate governance
 Insistence on forms and structures
 Overarching regulations
 Regulatory overkill
 Lack of adequate number of strong, independent
directors
 Large liabilities for companies and officers
 Has the pendulum swung too far?
 For the first time in the decade-long history of the
Index of Economic Freedom, the U.S. is no longer
among the top ten “most free” countries
• Wall Street Journal and the Heritage Foundation
“Index of Economic Freedom”

5. Current status on corporate governance
Comparison of Board structure – Indian top 50 Vs U.S. top 50 – Key Findings
Parameter India (Nifty Fifty companies) US (top 50 out of NYSE 100 index)
Ownership pattern 48% of Indian companies have largest shareholder
holding over 50%
Largest shareholder holds less than 10%
in all cases
Board size Largest board size – 17. smallest – 5 Largest board size 18. smallest – 10
44% of the top 50 companies have more than 12
directors
66% of the top 50 companies have more
than 12 directors
Board independence 58% of companies have a board majority of
independent directors
12% have less than 1/3rd
of their directors
independent
All companies have a board majority of
independent directors
Executive directors in board In 35 companies 50% of the directors – or more – are
executive directors
Boards of 49 companies out of 50 have
less than 25% executive directors
Chairman and CEO 60% have separate Chairman and CEO Only 20% have separate Chairman and
CEO
Lead independent director 3 companies have lead independent directors 20 companies have lead independent
directors
Board committees All companies have audit committees – 54% have
fully independent Audit Committees
33 companies have remuneration committees – of
these 14 fully independent and 16 have majority
independent committees
9 companies have nomination committees – 6 are
fully independent and 3 have majority independent
committees
All companies have fully independent
audit remuneration and nomination
committees
Source: Crisil Report on Corporate Governance

6. Governance and performance
 Good governance leads to good performance
 It creates an open and transparent system
 It improves communication and breaks down
systematic barriers to flow of information
 Good governance allows decision making based on
data. It reduces risk
 Good governance helps in creating a brand and
creates comfort for all stakeholders and society

7. Does performance depend on governance
 Short term performance does not necessarily
depend on governance
 Market asymmetries are responsible for this.
However, this increases risk. This also creates
barrier to long term growth
 We all know what happened to Enron?

8. Does performance depend on governance
 Medium to long term performance requires
governance
 Most companies which have grown in the last 25
years have outstanding performance and have
good governance structure
 A good governance structure treats all
stakeholders fairly
 Governance alone cannot ensure performance

9. Governance and Performance - issues
 Is governance a luxury that can be afforded only
by the performing companies?
 Do strategies and tactics need to change to
accommodate governance with performance?
 Is there a time-lag between governance and
performance?
 Are stakeholders concerned about “performance”
or “promised performance” ?

10. Governance and Performance
measurement - issues
 Is governance behavior motivated by legislation?
• Do standards vary with jurisdictions or do you adopt
the best option?
• Do you choose the right thing to do irrespective of
whether it’s mandatory or not?
 Is performance evaluation limited to valuation metrics?
• Is it only ROE, Net margin, growth, shareholder
wealth creation?
 Do performance measures need to be holistic?
• We need to encompass all stakeholders
• Governance is an enabler for holistic performance
 How do managers better understand governance
requirements?
• Do we need market research for governance
requirements?

11. Investing in Corporate Governance
 Companies need to invest in good governance
 Corporate governance has a direct bearing on
business performance and thereby ROI
 Leverage the power of IT
 On average, businesses with superior governance
practices generate 20 percent greater profits than
other companies
 A study based on 256 companies conducted at the
MIT Sloan School of Management

12. Thank You