ICSI NATIONAL AWARDS FOR EXCELLENCE IN CORPORATE GOVERNANCE, 2016-Some musings on questionaire

I was going through the questionaire for the ICSI award out of interest. Following points struck me as points which even more investors/professionals miss out, and hence I thought it warrants a post. One can read the full questionaire below
https://www.icsi.edu/webmodules/Final_Questionnaire_1092016.docx

1. Internal Auditor is envisaged as internal & external, and membership number is sought in each case. Interesting way to hint at professionals.
2. Like in the tax audit form, qualifications in cost audit/secretarial audit are also sought.
3. For women directors, it is specially asked if she is executive and/or independent. 
4. It is asked whether the Company Secretary reports to the CEO/MD/ED, General Counsel, CFO or any other official. Probably they want to gather data on the 'aukaad' of the professional :D since most other KMP would report into the CEO or the Director(Finance & Legal)
5. It is further asked about whether a separate compliance department exists outside of the CFO/CEO offices, and its reporting
6. Credit Rating trend in year is asked-Whether worse/unchanged/improved and whether outlook worse/unchanged/improved
7. % of differently abled employees is sought
8. Independent assessment of sustainability initiatives/reporting is asked. 

Investors would do well to see many of these points especially internal audit, credit rating, independent CSR/Sustainability spend assessment.

The benefits and drawbacks of working in finance for a publicly traded/listed company in India

Ok I admit it. The title is a blatant effort to win some SEO brownie points. But thats par of the course these days, and given the uniqueness of this topic (I hardly found any relevant links), I thought I would write on this subject, from personal experience, and also from interactions with other finance professionals. Firstly, some background on what distinguishes a public listed company from other companies?

• Minority shareholders: These are often the very reason for a listing, and to ensure liquidity in trading, Indian stock exchanges mandate a minimum 25% free float i.e promoter shareholding capped at 75%. Not coincidently. key corporate actions in India require a special majority i.e 76% of shareholders to approve matters, but since this % is calculated on those shareholders present and voting, 75% or a much lower shareholding is often enough in practice. That said, minority shareholders have a veto on certain related party transactions and actions, so one cannot ignore them. 
• Periodic reporting: Quarterly reports in addition to annual reports, within the stipulated timeline of 45 days/60 days
• Internal Financial Controls certification: For listed companies, there is a CXO level certification with stringent penal liabilities if proved wrong. Hence, the demand for a robust finance controller who can keep the CXO from jail 
• Voluminous disclosures/ Multiplying non financial reporting Be it CSR, ESG, BRR, IND-AS, IFRS..listed companies are often the first guinea pigs of financial and non financial reporting since they are public interest entities. This can prove a burden to report all this.
• Independent Directors/Audit Committees: For listed companies, there are mandates to have a certain proportion of independent directors, over and above that stipulated by the Companies Act 2013. These additional stakeholders bring new perspectives, but could also challenge management in a manner not to the former's liking

Why do I single out the finance function here? While all functions experience a (hopefully) more stringent control environment, it is the finance and legal functions whose stewardship role increases here.  The difference being clear (hopefully), let us now see why a listed company would be preferable to a finance professional, and why sometimes it may not. Firstly the pros

• Independent Audit Committee (in theory)
• Better controls
• Multiple audits/certifications
• Multiple professional interactions
• Exposure to handling minority interests
• Investor Relations: This is a unique role in public traded companies, since even private equity companies would have more of internal MIS than an extensive IR engagement. Preparing IR decks, financial press releases, stakeholder mapping
• AGM/EGM: This is a JV between Finance and Secretarial functions, however every finance professional should get involved in the preparation for an AGM of a listed company atleast once so that they appreciate the extent of background effort
• Strategic disclosure drafting:Strike a balance between disclosing more to please investors and win awards, versus revealing business model insights.

The cons however could be

• Non value adding work: Be it reviewing an annual report for the nth time before review despite the knowledge that it will likely not be read by even 0.1% of investors, getting backup certifications/attestations for the comfort of independent board members
• Disclosure overdose: Not all reporting is likely to help investors(eg BRR) but is mandated and wastes man-months in its preparation
• Potential Legal Liability: If you are a victim of management override(possible if other functions have 'promoter appointed' people-like a 'Lala company'), you are still presumed to be culpable unless due diligence is proven: 
• Dealing with controlling shareholder-ethics: The controlling shareholder/management is the on
• Hierarchial/Ladder-Big company woes: Listed companies usually tend to be large profitable entities (when initially listed atleast). So the issues of 

Overall, it is for one to map their stage of career, aspirations

The benefits and drawbacks of working in finance for a publicly traded/listed company in India

Ok I admit it. The title is a blatant effort to win some SEO brownie points. But thats par of the course these days, and given the uniqueness of this topic (I hardly found any relevant links), I thought I would write on this subject, from personal experience, and also from interactions with other finance professionals. Firstly, some background on what distinguishes a public listed company from other companies?

• Minority shareholders: These are often the very reason for a listing, and to ensure liquidity in trading, Indian stock exchanges mandate a minimum 25% free float i.e promoter shareholding capped at 75%. Not coincidently. key corporate actions in India require a special majority i.e 76% of shareholders to approve matters, but since this % is calculated on those shareholders present and voting, 75% or a much lower shareholding is often enough in practice. That said, minority shareholders have a veto on certain related party transactions and actions, so one cannot ignore them. 
• Periodic reporting: Quarterly reports in addition to annual reports, within the stipulated timeline of 45 days/60 days
• Internal Financial Controls certification: For listed companies, there is a CXO level certification with stringent penal liabilities if proved wrong. Hence, the demand for a robust finance controller who can keep the CXO from jail 
• Voluminous disclosures/ Multiplying non financial reporting Be it CSR, ESG, BRR, IND-AS, IFRS..listed companies are often the first guinea pigs of financial and non financial reporting since they are public interest entities. This can prove a burden to report all this.
• Independent Directors/Audit Committees: For listed companies, there are mandates to have a certain proportion of independent directors, over and above that stipulated by the Companies Act 2013. These additional stakeholders bring new perspectives, but could also challenge management in a manner not to the former's liking

Why do I single out the finance function here? While all functions experience a (hopefully) more stringent control environment, it is the finance and legal functions whose stewardship role increases here.  The difference being clear (hopefully), let us now see why a listed company would be preferable to a finance professional, and why sometimes it may not. Firstly the pros

• Independent Audit Committee (in theory)
• Better controls
• Multiple audits/certifications
• Multiple professional interactions
• Exposure to handling minority interests
• Investor Relations: This is a unique role in public traded companies, since even private equity companies would have more of internal MIS than an extensive IR engagement. Preparing IR decks, financial press releases, stakeholder mapping
• AGM/EGM: This is a JV between Finance and Secretarial functions, however every finance professional should get involved in the preparation for an AGM of a listed company atleast once so that they appreciate the extent of background effort
• Strategic disclosure drafting:Strike a balance between disclosing more to please investors and win awards, versus revealing business model insights.

The cons however could be

• Non value adding work: Be it reviewing an annual report for the nth time before review despite the knowledge that it will likely not be read by even 0.1% of investors, getting backup certifications/attestations for the comfort of independent board members
• Disclosure overdose: Not all reporting is likely to help investors(eg BRR) but is mandated and wastes man-months in its preparation
• Potential Legal Liability: If you are a victim of management override(possible if other functions have 'promoter appointed' people-like a 'Lala company'), you are still presumed to be culpable unless due diligence is proven: 
• Dealing with controlling shareholder-ethics: The controlling shareholder/management is the on
• Hierarchial/Ladder-Big company woes: Listed companies usually tend to be large profitable entities (when initially listed atleast). So the issues of 

Overall, it is for one to map their stage of career, aspirations

Are shareholder value maximizing managers like Valmiki of Mahabharata?

Those who have read the Mahabharata would recognize what I'm alluding it. For the others, it is suffice to explain that saint Valmiki was originally a highway robber, who robbed others for a living. Once, he tried to rob a wise person who asked him about whom was he doing all that for. When the robber replied that he was doing this to support his family, the wise person asked him to return home and confirm with them whether they endorsed his actions or not. Hea was quite confident that the very people he was doing it for, would endorse and support his actions. To his shock, his wife and children(for whom he was robbing others) said that they did not want his sins to rub on to them. They felt that a basic living was his duty to provide, but they certainly did not want to share in his sins. Shocked by this, the robber saw his error and then reformed, to become the renowed saint Valmiki.

So what is the point of this parable? Under the garb of shareholder value maximization, other stakeholders are often squeezed. Suppliers are compelled to sell at unremunerative prices and often paid late; employees are underpaid and overworked; society is denuded of clean air/water and loaded with congestion/pollution; Governments are deprived of their due tax revenues etc. But it is often argued that this is what shareholders want! But in the absence of direct democracy for routine issues, it is not possible to ask them. But if companies did ask their shareholders, I'm sure their response would be similar to that of Valmiki's family. After all, psychological studies show that humans are not 100% rational, and are often suckers for a sob story.

Now, some may point to the 'Knowing Doing' gap i,e the importance of looking at people's actions instead of their professed sentiments. There is some truth in this because people are aware of the causes and ill effects of smoking, obesity and a host of other vices. Still, they remain addicted to it OR inertia stops them from changing habits. Similarly, in the investing context, though many investors especially the institutional ones have learnt the importance of inclusive corporate governance etc, it is doubtful that they give a damm, With the exception of Norway SWF, Calpers and a handful of other investors; few investors have behaved like Valmiki's family(censure and repudiation) when confronted with evidence of corporate wrong doing. The market capitalization may suffer in fear of economic penalties but not otherwise. So the managers may not be wrong, when they feel that they have the support of their shareholder family, in whatever they do.

Corporate Governance and Political governance deficit-the similarities

In 2010/2011, several scams rocked the Indian political scenario right from the mother of them all(2G spectrum allocation, Karnataka mining licenses, Adarsh housing society etc). Chief Ministers were dismissed, inquiry commissions set up and heads rolled. The media gleefully credited their reporting and publicity as a deterrent factor. All that was to change when the spurt of corporate scams errupted. Just recouping from the FY09 Satyam scam, multiple scams were exposed right from the mining licenses(Jharkhand, Karnataka), land acquisition(for SEZ, projects), Radia tapes, bribery, cases etc. While some CEOs were arrested/dismissed(Gautam Doshi, Everonn CEO, Money Matters, LIC Housing Finance), industry forums were quick to pass them off as rotten apples. But on deeper reflection, one should not have been surprised for these scams. After all, the inconvinient truth is that corporate governance reflects the society it resides in. And the common reasons are

• No separation of powers:-Like how most political parties are one man shows, so are most companies. The CEO-Chairman position is not separated.
• First past the post:-Like how 30% voting share is often enough to win seats, the same is true for companies as well. As there is no proportional representation, the shareholders with even 30% voting power can often control the Board easily.
• Redistribution focus over governance:-Few Indians would genuinely expect their MP/MLA to debate larger issues in the assembly/parliament, at the cost of giving attention to local issues. Similarly, investors do not expect their directors to show exquisite coalition dharma viz corporate governance; but instead expect share price maximization
• Opaque funding/controls:-like how political parties benefit from anonymous contributions and exempt income, often without tax returns scrutiny; company promoters benefit from related party transactions that enable major siphoning out of funds. 

However, there are major exceptions also

•   Contest ability is much more in politics than in companies, where hostile takovers are quite rare. Companies can be defeated at the market place, but rarely are corporate power battles(especially takeover bids) fought in public.
• Coalition dharma is much more relevant in companies than at the assemble level in politics. While the company must juggle the interests of workers, investors, employees, government(at the bare minimum!!), the politician is often content with jugging the interests of his voters(or atleast appearing to do so).

This analogy is so relevant that next time we blame the Government for anything, it is better to take a hard look at our corporates, to see whether we are committing the same sins or not.