Full-day highlights of event,”Corporate Governance in Investing: Theory vs Practice”, Pune 2019

Contributed By: Ria Agarwal

The Pune chapter of CFA Society India held its first marquee event in November 2019 on “Corporate Governance in Investing: Theory vs Practice”. Considering the recent fiasco’s in the financial services sector, Corporate Governance is re-gaining a lot of importance in investing.

Here are some of the key takeaways from the conference-

Session One: Trends in Corporate Governance

Speaker: Chandrashekhar Bhave, Chairman, IIHS Board

Moderator: Bharat Pathak, Director, Wealth Managers (India) Pvt. Ltd

The session of, ‘Trends on corporate governance’, conducted by Chandrashekar B Bhave gave us in-depth knowledge on how and why there was a transformation of governance practices in India. He explained what governance is in his own words, i.e. ‘The ability to agree on a certain set of rules and follow the same to gain as a group.’ The speaker elaborated and said that although we have to keep our self-regulation policies strong, the need for external regulation by authorities is also growing due to the increasing complexity and cultural differences in our society today. Reforms are always messy & long process; we need the courage to deal with reforms. He also talked about the role of SEBI in some of the key changes happened in Indian Capital Markets. According to him, today, corporate governance is not just for the owners v/s minority interest, it’s about Owners/Managers V/s Environment/Sustainability. Companies should work to create an impact on society at large. There is a need for an awareness of interest and ensure a balance between competing interest. Merely appointing gate keepers are not enough, we need to address complex issues and find balance.

The speaker recommended a few practices to follow in the future that would help to increase better governance practices like

1) Company interest should not be just for themselves but for society at large

2) Those who are in power should always keep their doors open

3) Authorities should be open to criticism and

4) Individuals and companies should keep trust in the higher authority, i.e. regulators and the agencies.

Session Two: The Tensions in Corporate Governance; And Why It’s Time for Transparency

Speaker: Andy Agathangelou, Founder, Transparency Task Force

Moderator: Arun Mantri, Founder & CEO, Mantri Capital

In the second session, Mr Andy Agathangelou talked about Transparency Task Force. A task force is usually a special unit just for a special task and increasing financial transparency is the special task which Andy is focusing on.  Andy said, ‘Transparency Task Force should be thought of as a movement to make the industry more transparent, truthful and trustworthy and these are the same principles that would lead to good corporate governance policies.

One of the most important pillars of good governance is having great transparency and this is exactly what the speaker focused on. He touched on two main questions that he proceeded to answer throughout his session.

• Why we need to contextualise CG into the bigger picture?
• What way the financial ecosystem needs to be changed.

Along with this, he mentioned a major problem that is prominent in the society, i.e. ‘The Trust Deficit’. Due to the increased normalisation of poor conduct of various companies in the industry, he said we as a society are becoming desensitized to it and are accepting malpractices as the norm. Unfortunately, one industry that is fundamentally dependent on trust comes in as one of the least trustworthy, that is – the banking and financial services industry. According to “The 2019 Edelman Trust Barometer”, Banking & Financial Services is the least trusted sector.

Andy mentioned four ways in which we can work to decrease the trust deficit.

• Bring together the right people
• Need to believe in the art of the possible
• Cultivate a sense of purpose about the change that is needed.
• Develop a plan

He said improvement for corporate governance requires a whole-system solution for a whole-system problem approach.

Just like the sustainable development goals of the United Nations, Andy has his own 12 Financial Development Goals that would help decrease governance failures significantly, but only if all of them are applied together.

Towards the end of the session, the speaker spoke about ways in which the members and students of CFA institute can affect change-

• Identify some governance failures and understand the causes for it.
• Identify if the structure of the company itself is the problem
• Study the real separation of the management and governance of the company
• Be suspicious if things are opaque
• Don’t understand our collective power to affect change.

Overall Andy left us with a call for action to help in the betterment of an economy, industry and company by promoting better corporate governance as individuals and as a society.

The moderator of the session, Mr Arun Mantri also proposed the idea of incorporating a corporate governance index.

Session Three: An Inside Perspective on Corporate Governance

Speakers:

M.S Unnikrishnan, MD & CEO, Thermax Limited

S.Sreenivasan, CFO, Bajaj Finserv Limited

Dr. Anand Deshpande, Founder Chairman & MD, Persistent Systems Limited

Moderator: Samit Vartak, Founder & CIO, SageOne Investment Advisors

The third session was conducted by Mr M.S. Unnikrishnan, Mr S. Shreenivasan and Dr. Anand Deshpande together. The session gave insights on Corporate Governance from the perspective of Family Businesses managed by professionals & family-driven businesses.

Mr Unnikrishnan spoke about how internal structures of companies play a critical role in good corporate governance practices. A few key points he mentioned were

• How space is created for independent directors
• Remuneration for independent directors should be assessed differently
• There should not be an unhealthy tension on both sides (Promoters -Managers)
• Good relations built over time can withstand healthy tensions
• Companies should avoid delay in correction and taking necessary action to avoid governance issues
• Ensure progressive practices in the organisation

The next speaker Mr. Sreenivasan spoke on the quality of management that needs to be prevalent in all industries along with some obstacles faced by many companies. Obstacles like the increasing cost of compliance, how the current laws are mostly for manufacturing companies and our need for newer more modern laws.

Broad evaluation, management awareness, pre-auditing techniques and active self-check on good and right governance are some ways that a company should follow. Another very important fact that was portrayed was that good governance and good profits do not have to be mutually exclusive, balanced growth is something most companies should strive for.

Next speaker for the session, Dr Anand Deshpande talked about how good corporate governance can be developed in family-driven businesses. He believes it is not just a company’s responsibility for short term profits, but it is (for a company and its employees) to maintain long term sustainability. This can be done only when companies can align their goals and objectives with the future direction.

He shared that companies should prioritise goals in the following order:

1) Value to customers

2) Invest in employees

3) Ethically support suppliers

4) Support and sustainably grow the community

5) Investigate the interests of the shareholders in the long term.

If the above is followed by every company in every industry, then we can achieve a much stronger and better economy.

In conclusion, he said that we can achieve our goals if we move from a rule-based regulation to a principle-based regulation.

Session Four: An Institutional Perspective on Corporate Governance

Speaker: JN Gupta, Founder & MD, Stakeholders Empowerment Services

Sampath Reddy, CIO, Bajaj Allianz Life Insurance

Moderator: Subrata Ray, Senior Group VP, ICRA Limited

Mr. JN Gupta said many are highly motivated by passion for their jobs and their businesses, but a lot of us are missing the passion towards good governance practices. Mr. JN Gupta showed us the mirror by his words. He focused on the hard-hitting facts regarding the failures of good governance practices from both sides of the coin, from companies and from the gatekeepers.

The speaker highlighted the problems in valuation reports like 1) they are less informative 2) if valuation report making is considered to be an art, then how are we getting identical reports from two independent sources. He also mentioned that we should have more discussion and analysis on the true independence of independent directors.

In the second half of the session, Mr. Sampath Reddy gave practical problems that one should probe. Below are a few aspects to check before investing in a company-

• Adequate capital asset allocation
• Should not have unrelated diversification
• Depreciation policies
• R&D expenditure
• Related party transactions
• Tax management
• Should not have too many subsidiaries
• Whistle-blower policies
• Banking and asset allocation

Towards the end, both speakers agreed that every job will have some kind of risk & liability and today’s corporate culture is becoming more radical & bolder.

Session Five: Corporate Governance- Investors’ Dilemma

Speaker: Vikas Deshmukh, Former Founder, MD TATA Elxsi

Moderator: Jaideep Merchant, Fund Manager, Janak Merchant Securities Pvt. Ltd.

Mr Vikas Deshmukh conducted the last session of the day. Keeping in line with corporate governance he spoke about the investor’s dilemma. He elaborated on it by saying that due to unstoppable economic globalization and intense political localization, the gatekeeper ecosystem is failing. The gatekeepers are the regulators, credit rating agencies and auditors. A few measures that could probably help in increasing better ESG practices are

1) have better methods to detect insider trading and decrease opacity of organizations

2) establish the difference between material and non-material information

3) keep the incentives received by the independent investors independent and away from the CEO’s discretion

4) develop stricter rules for succession of positions in corporates.

Finally, in today’s world, there has been an increased focus on specific companies that are environmentally and socially responsible.