Keynote Address: Corporate Governance and Boards by NR Narayan Murthy

Speaker: NR Narayana Murthy, Founder – Infosys Ltd
Contributed By: Nimisha Pandit, CFA, Volunteer – CFA Society India

 

“Good Corporate Governance is creating sustained competitive differentiation in the marketplace to maximize the shareholder value legally, ethically and on a sustainable basis while ensuring fairness, transparency and accountability to every stakeholder of a company.” – NR Narayana Murthy

NR Narayana Murthy opened his Keynote Address on ‘Corporate Governance and Boards’ by explaining how economic reforms of 1991 influenced companies in India.

  • Abolishment of the office of ‘Controller of Capital Issue’ made listing of companies on stock exchange an attractive proposition for entrepreneurs.
  • Traditional businesses realized the power of Price/Earnings ratio and how addition of a rupee in the listed company’s profits translated in multifold addition to the promoters’ personal wealth.
  • India welcomed large number of global institutional investors. These global investors expected Indian companies to raise the level of financial disclosures to match the disclosure standards in developed countries. Resulting in higher disclosures and transparency in the capital markets.

As per Mr. Murthy’s observations, in the last three decades since the economic reforms, the level of Corporate Governance in India has improved, thanks to SEBI. However, in recent years there have been a few instances of serious governance deficits in some Indian companies. And that has created doubts among international and domestic investors about the quality of Corporate Governance of companies in India. Good governance in a company is essential to enhance confidence, trust and enthusiasm of all stakeholders.

There are 3 key players in a Corporate Governance System:

i). Shareholders who own the company in proportion to their shareholding

ii). Board of Directors who oversee the management and are responsible for governance

iii). Management (CXOs and Executive Officers) who run the company

 

Corporate Governance is a reflection of the culture and values of the company’s Board of Directors and management.

Mr. Murthy explained in detail his views on the role and responsibilities of Board of Directors. He emphasized that the Board of Directors are appointed by and are accountable to the shareholders. According to him the primary functions of the Corporate Boards are:  

  • Ensuring robust growth in company’s topline and bottom line,
  • Enhancing and protecting company’s reputation,
  • Reviewing, critiquing and improving the strategies presented by the management,
  • Setting clear KPIs and performance-based compensation for CXOs and key officers after consulting knowledgeable shareholders,
  • Creating succession plan for CXOs and key officers
  • Identifying risks and taking timely actions to mitigate the risks, putting in place systems of information, control, and checks, ensuring full compliance will all regulations,
  • Reviewing and approving all capital allocation decisions
  • Installing a robust whistleblower policy and addressing shareholder grievances in fair and transparent manner.

In his view, the primary Corporate Governance problem is minimization of agency cost. The agency cost is the cost incurred by the management for achieving the objectives of the company as decided by the shareholders. Agency costs tend to be inflated when there is a divergence of interest between the management and shareholders.

In professionally managed companies such costs could manifest in the form of management taking unjustifiable compensation for themselves or using the company’s resources for personal benefits and comforts. In case of promoter managed companies this problem generally manifests as asymmetry of benefits created by the owner mangers in their own favor against the interest of minority shareholders. Common examples are diversion of the listed company’s funds towards promoters’ privately held companies by way of corporate deposits or loans. Generally, such related party transactions favor the other party in the transaction and result in inflated costs and financial damages to the listed company.  The duty of the board is to prevent such transactions.

If we want good Corporate Governance to become a norm in India, we need to create a climate in business circles that gives more importance to earning ‘respect’ than wealth and power. Before taking any major decision, Board of Directors and management should debate if the decision enhances ‘respect’ for the company in the eyes of stakeholders & society.

For making good Corporate Governance a norm in India, Mr. Murthy offered his suggestions on following four key issues.  

 

Creating A Competent and Value-Based Board

i). Appoint a person with competence, character and commitment as the Chairman of the Board.

ii). Bring in competent, accomplished, value-based and independent people as the Board members. Appoint Board members based on their expertise in key business functions like sales, HR, finance etc.

iii). Take the board members through a robust training and certification program on the company’s business essentials, good governance, and committees’ responsibilities.

iv). Conduct a peer evaluation of each member of the board every year.

v). Chairman to provide performance appraisal and feedback to board members. Top 2-5 institutional investors to evaluate chairman’s performance.

 

Top Management’s Compensation

Management remuneration should be based on 3 fundamental principles

i). Fair multiple of compensation of lowest level employee

ii). Full transparency

iii). Full accountability by linking the variable part with long term company’s performance.

 

Whistleblowers Policy and Investigation 

A corporation must provide total protection to whistleblowers against vendetta by their bosses. Addressing a whistleblower complaint in a transparent and trust enhancing manner is a must for good governance.

i). If the complaint is against the Board or top management, the Board should totally recuse themselves of the investigation of the complaint. One cannot be the judge, the jury and the defendant.

ii). In such case, the Chairman can request top 10 shareholders to form an independent committee to investigate the complaint.

iii). The Board should empower the Company Secretary to provide all the necessary resources to the independent investigating committee to carry out the investigation.

iv). SEBI should intervene if friends and related entities of the Board or management are appointed to investigate the whistleblower’s complaint. In such case SEBI may take the responsibility of appointing the investigating committee.

 

If the investigation concludes that the Board and management did not perform their fiduciary duties and contributed to governance deficit

i). The investigating committee must recommend to shareholders a penalty which must be paid by every member of board and concerned officers for failing to discharge their fiduciary responsibility.

ii). SEBI may evolve a gradation of penalties from a mere warning to blacklisting those board members based on the severity of the governance deficit.

iii). Based on severity of deficit shareholders may claw back a portion of compensation received by the Board members and management during the tenure of the reported incidence.

 

Transparency

Mr. Murthy reiterated that the Board of Directors serve at the pleasure of the shareholders. Shareholders should have access to every piece of information concerning the investigation. However, there should not be any selective disclosure to any a group of shareholders. Companies should provide full details of the investigation on its website for access to all shareholders.

Mr. Murthy closed the keynote address with a quote by Theodore Roosevelt, hoping India’s corporate leaders will live up to these seminal words.

“Americanism means the virtues of courage, honor, justice, truth, sincerity, and hardihood—the virtues that made America. The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living and the get-rich-quick theory of life.” – Theodore Roosevelt



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