33rd National Conference of the Institute of Chartered Accountants of Sri Lanka

Winning Against the Odds

Ranjith Fernando

19 October, 2012 #

THE RELEVANCE OF GOVERNANCE#HOW RELEVANT IS GOVERNANCE AT THESE THREE LEVELSCAN RIGHT GOVERNANCE PRACTICES HELP USWIN

WINNING AT THREE LEVELS.COUNTRY, CORPORATE, & CITIZEN#3

WHAT IS GOVERNANCE ?#4GOVERNANCE IS THESYSTEM BY WHICH COMPANIES ARE DIRECTED AND CONTROLLEDCADBURY COMMITTEE

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CORPORATE GOVERNANCE ESTABLISHES CLEAR STRUCTURES REGARDING ACCOUNTABILITY, RESPONSIBILITY, AND TRANSPARENCY, AT THE HEAD OF THE COMPANY, AND DEFINES THE ROLE OF THE BOARDS AND THE MANAGEMENT ULRICH STEGER AND WOLFGANG AMAAN#6OECD DEFINITIONTHE SYSTEM BY WHICH BUSINESS CORPORATIONS ARE DIRECTED & CONTROLLED.SPECIFIES THE DISTRIBUTION OF RIGHTS AND RESPONSIBILITIES AMONG DIFFRERENT PARTICIPANTS IN THE CORPORATION SUCH AS THE BOARD, MANAGERS, SHAREHOLDERS AND OTHER STAKEHOLDERS, AND SPELLS OUT THE RULES AND PROCEDURES FOR MAKING DECISIONS ON CORPORATE AFFAIRSBY DOING THIS, IT ALSO PROVIDES THE STRUCTURE THROUGH WHICH THE COMPANY OBJECTIVES ARE SET AND THE MEANS OF ATTAINING THOSE OBJECTIVES AND MONITORING PERFORMANCE#7THE WORDS CORPORATE GOVERNANCE ENTERED THE LEXICON OF BUSINESS ONLY IN THE MID 1980sHOWEVER THE PROBLEMS TO WHICH IT EMERGED AS A RESPONSE, GOES FAR BACK INTO THE 1840s.AFTER THE EVOLUTION OF THE LARGECORPORATES.#8RATIONALE FOR GOVERNANCEARISES FROMTHE NATURE OF THE RELATIONSHIPTHE NEO CLASSICALPRINCIPAL / AGENT THEORYORTHE MEANS-BERLE DILEMMA#9THE TYPICAL AGENCY PROBLEMWHEN MANAGEMENT IS SEPERATED FROM OWNERSHIP-INFORMATION DISSYMMETRYHOW CAN THE OWNER ENSURE THAT THE MANAGER OR THE AGENT

ACTS IN THE INTERESTS OF THE OWNERS?TO MAXIMISE SHAREHOLDER VALUE#10CONCERNS AND RESPONSESACCOUNTABILITYTRANSPARENCY DEFINITION OF ROLESCONCENTRATION OF POWER - SEPERATION OF POWERS, CHECKS AND BALANCES BIAS AND SUBJECTIVITY - TRANSPARENCY, CONFLICT EQUITY & FAIRPLAY OF INTEREST, RELATED PARTY..#11THEREAFTER MANY OTHER REPORTS HAMPEL, GREENBURY, THE COMBINED CODE ETC .MORE REGULATIONSSARBANES-OXLEY ACT (2002)

FIRST SIGNIFICANT DEVELOPMENTTHE CADBURY REPORT IN 1992MADE MANDATORY FOR LISTED COMPANIES IN 1993. #12THE NATURE OF THE RESPONSESHUTTING THE DOOR AFTER THE HORSE HAS BOLTEDREACTION TO FRAUDS, CORPORATE FAILURES, MARKET FAILURES,BURSTING OF BUBBLES.#13FACTORS THAT INFLUENCE THE FORM OFTHE CORPORATE GOVERNANCE REGIMEPERSONALITIESBUSINESS MODEL AND INDUSTRY CONTEXTOWNERSHIPLEGAL AND POLITICAL ENVIRONMENT#14TYPES OF CORPORATE GOVERNANCE SYSTEMSMARKET DRIVEN SHAREHOLDER DRIVEN SMALL FIRMS LARGE COMPANIESFAST MOVING INDUSTRIES CAPITAL INTENSIVECEO DOMINATED CHECKS & BALANCESDEPENDENT DIRECTORS

ORGANIZATION DRIVEN SOCIAL SYSTEM DRIVENPROTECTED BUREAUCRACIES FAMILY FIRMSKNOWLEDGE BASED FIRMS STATE INDUSTRIESCONSENSUS ORIENTED OWNER DOMINATED STAKEHOLDER BUY IN

#15IS GOVERNANCE RELEVANT FOR WINNING AT THE :

COUNTRY LEVEL ?THE COMPANY LEVEL ?CITIZEN LEVEL ?#WHAT DOES WINNING AT THE COUNTRY LEVELMEAN?#17POLITICAL, SOCIAL & ECONOMIC STABILITYPOSITIVE OUTLOOK- CONFIDENCE OF THE FUTUREPEACE, LAW AND ORDERECONOMIC GROWTHEQUITABLE DISTRIBUTION OF WEALTHFREEDOM OF EXPRESSION/ BELIEF ETC.QUALITY OF LIFERULE OF THE LAW

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CAN A COUNTRY ACHIEVE THE ABOVEDISREGARDING GOVERNANCE ? #19DO WE HAVE A TYPICAL AGENCY PROBLEM?OWNER DISTINCT FROM MANAGER ?

HOW CAN WE ENSURE THAT MANAGER ACTS IN THE INTERESTS OF THE OWNERS ?TO MAXIMIZE SHAREHOLDER VALUE

IS GOVERNANCE RELEVANT/IMPORTANT IN WINNING AT THE COUNTRY LEVEL?#A SIMILARPRINCIPAL/AGENT PROBLEM ?

SEPERATION OF OWNERSHIP & MANAGEMENT ?#21

ACCOUNTABILITYTRANSPARENCYCONCENTRATION OF POWER

GOVERNANCE BASED RESPONSETHE SEPERATION OF POWERSCHECKS AND BALANCESPERIODIC ELECTIONS#THE SEPERATION OF POWERSMONTESQUIEUS DOCTRINE (THE SPIRIT OF THE LAWS 1748)WHEN THE EXECUTIVE AND LEGISLATIVE POWERS ARE UNITED IN THE SAME PERSON, OR IN THE SAME BODY. THERE CAN BE NO FREEDOM; BECAUSE APPREHENSIONS MAY ARISE LEST THE SAME MONARCH OR SENATE SHOULD ENACT TYRANNICAL LAWS TO EXECUTE THEM IN A TYRANNICAL MANNER

#23THE ACCUMULATION OF ALL POWERS, LEGISLATIVE, EXECUTIVE AND JUDICIAL, IN THE SAME HANDS, WHETHER OF ONE, A FEW OR MANY AND WHETHER HEREDITARY, SELF-APPOINTED OR ELECTED, MAY JUSTLY BE PRONOUNCED, THE VERY DEFINITION OF TYRANNY. (James Madison- THE FEDERALIST PAPERS)

#COMPETITIVE BIDDINGEQUAL OPPORTUNITYEXECUTIVE APPOINTMENTS - MERITOCRACYNEPOTISM

TRANSPARENCY#GOVERNANCE AT THE COUNTRY LEVELOTHER CRITERIARULE OF THE LAWFREEDOM OF SPEECHFREE & FAIR ELECTIONS.FISCAL DISCIPLINEFREEDOM OF WORSHIPINVESTMENT CLIMATELAW & ORDER#26IS GOVERNANCE RELEVANT FOR WINNING AT THE CORPORATE LEVEL?#ATTAINING CORPORATE GOALS AND OBJECTIVES.INCREASING SHAREHOLDER VALUESUSTAINABILITYWHAT IS WINNING AT THE CORPORATE LEVEL ?

#28IF THE ANSWER IS YESTHE PITFALLS ARE PRESENTAND THUS THE RELEVANCE OF GOVERNANCE

IS THERE A PRINCIPAL/AGENT RELATIONSHIP?

# NO STATISTICALLY SIGNIFICANT CORRELATION BETWEEN CG AND FINANCIAL PERFORMANCEBUTGOVERNANCE IS THE KEY TO THE EFFECTIVENESS OF ALL OTHER FACTORS. #

FACTORS THAT IMPACT ON CORPORATE PERFORMANCETHE DESIGN OF THE STRUCTURE.THE SEPERATION OF POWERS.DEFINING THE ROLES.COMPOSITION OF THE BOARD.INDEPENDENT DIRECTORS.THE CHECKS AND BALANCES.#

THE COMMITTEE STRUCTURES.CHAIRMAN AND CEO.

ACCOUNTABILITYTRANSPARENCY#32LESSONS FROM PAST CORPORATE FAILURESFOCUS ON LEGAL STRUCTURES AND OUTWARD FORM INSUFFICIENT.DIFFICULTY IN LEGISLATING FOR BEHAVIOURAL ASPECTS.GOVERNANCE CODESINTERVENTION OF A REGULATORJUDGEMENTAL ASPECTS Eg. FIT & PROPER #

FORM, STRUCTURE & PROCEDURE

CAN BE LEGISLATED UPONBUTBEHAVIOURAL ASPECTS, MORALITYIS DIFFICULT TO LEGISLATE UPONFLEXIBILITY OF A CODE#34THE KEY IS NOT STRUCTURAL BUT SOCIAL#35

Inadequacy of conventional wisdomJeffry Sannenfeld, Harvard Business School#ENRONBoard included Stanford Dean, Former CEO of an Insurance company and an International Bank, Hedge Fund Manager, Prominent Asian Financier and a competent Economist#

EXEMPLARY BOARDS ARE ROBUSTANDEFFECTIVESOCIAL SYSTEMS#A VIRTUOUSCYCLE OFRESPECTTRUSTANDCANDOR#

SPIRITEDGIVE AND TAKEA CHEMISTRY THATCANNOT BEQUANTIFIED

EG: UPS#THE ROLE OF THE REGULATOR#41THE REGULATOR MUST A PERSON WITH AN IMPECCABLECHARACTER#42THE PROCESS FOR SELECTING A REGULATOR#43WINNING AT THE COMPANY LEVELCORPORATE GOVERNANCE REGIMEIS CRITICAL#44

HOW IMPORTANT IS CORPORATE GOVERNANCEFOR CITIZENSTO WIN#WHAT DOES WINNING MEAN FOR A CITIZEN ?HOPE AND FAITH IN THE FUTURE. A VISION HE/SHE BELIEVES IN.EQUAL OPPORTUNITY.RULE OF THE LAW.ABUNDANCE OF OPPORTUNITY.EQUITABLE DISTRIBUTION OF WEALTH.#HOW CAN CITIZENS COLLECTIVELY WIN IN A SUSTAINABLE MANNER ?ONLY IF THE COUNTRY WINSONLY IF THE COMPANY WINS#47TURBULENT TIMES DEMAND SACRIFICE, COMMITMENT, HARD WORKCOUNTRIES THAT HAVE FACED HARD TIMES AND WON, HAVE HAD LEADERS WHO HAVE DEMANDED GREAT SACRIFICE FROM ITS PEOPLE AND OBTAINED IT. THEY COULD DO SO ONLY IF THEY THEMSELVES PRACTISED GOOD GOVERNANCE#48

IN A WORLD THAT HAS INCREASINGLY BECOME INTERDEPENDANT

IN A WORLD WHERE MARKETS HAVE BECOME BORDERLESSIN A WORLD WHERE CONCEPTS SUCH AS FAIRPLAY, JUSTICE, ACCOUNTABILITY, TRANSPARENCY ARE JUDGED, NOT BY OUR OWN STANDARDS BUT BY INTERNATIONAL STANDARDS

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NO COUNTRY CANWIN

IN ISOLATION.IT IS THE GOVERNANCE REGIME THAT GIVES A COUNTRYINTERNATIONAL LEGITIMACY.#50WINNING IS IMPORTANTWINNING IS BEING NUMBER ONEWHAT DOES IT TAKE TO BE NUMBER ONE ?#51

WHAT IT TAKES TO BE NUMBER 1 ? VINCE LOMBARDI

WINNING IS NOT A SOMETIME THING. IT IS ALL TIME THING. YOU DONT WIN ONCE IN A WHILE, YOU DONT DO THINGS RIGHT ONCE IN A WHILE. YOU DO THINGS RIGHT ALL THE TIME. WINNING IS A HABIT. UNFORTUNATELY SO IS LOSING. #52

THERE IS NO ROOM FOR SECOND PLACE. THERE IS ONLY ONE PLACE IN MY GAME, AND THAT IS FIRST PLACE. I HAVE FINISHED SECOND TWICE IN MY TIME AT GREEN BAY, AND I DONT WANT TO FINISH SECOND AGAIN. THERE IS A SECOND PLACE BOWL GAME, BUT IT FOR LOSERS AND PLAYED BY LOSERS. IT IS AND ALWAYS HAS BEEN AN AMERICAN ZEAL TO BE FIRST IN ANYTHING WE DO, AND TO WIN, AND TO WIN, AND TO WIN.#

EVERY TIME A FOOTBALL PLAYER GOES TO PLAY HIS TRADE HES GOT TO PLAY FROM THE GROUND UP- FROM THE SOLES OF HIS FEET RIGHT UPTO HIS HEAD. EVERY INCH OF HIM HAS TO PLAY. SOME GUYS PLAY WITH THEIR HEADS. THATS O.K. YOUVE GOT TO BE SMART TO BE NUMBER ONE IN ANY BUSINESS. BUT MORE IMPORTANTLY, YOUVE GOT TO PLAY WITH YOUR HEART, WITH EVERY FIBRE OF YOUR BODY.

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IF YOU ARE LUCKY ENOUGH TO FIND A GUY WITH A LOT OF HEAD AND A LOT OF HEART, HES NEVER GOING TO COME OFF THE FIELD SECOND.

RUNNING A FOOTBALL TEAM IS NO DIFFERENT FROM RUNNING ANY OTHER KIND OF ORGANIZATION- AN ARMY, A POLITICAL PARTY, OR A BUSINESS. THE PRINCIPLES ARE THE SAME. THE OBJECT IS TO WIN- TO BEAT THE OTHER GUY.#55

MAY BE THAT SOUNDS HARD OR CRUEL. I DONT THINK IT IS. IT IS A REALITY OF LIFE THAT MEN ARE COMPETITIVE AND THE MOST COMPETITIVE GAMES DRAW THE MOST COMPETITIVE MEN. THATS WHY THEY ARE THERE- TO COMPETE. TO KNOW THE RULES AND OBJECTIVES WHEN THEY GET IN THE GAME. THE OBJECT IS TO WIN FAIRLY, SQUARELY, BY THE RULES BUT TO WIN.

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AND IN TRUTH, I;VE NEVER KNOWN A MAN WORTH HIS SALT WHO IN THE LONG RUN, DEEP DOWN IN HIS HEART, DIDNT APPRECIATE THE GRIND, THE DISCIPLINE. THERE IS SOMETHING IN GOOD MEN THAT REALLY YEARNS FOR DISCIPLINE AND THE HARSH REALITY OF HEAD TO HEAD COMBAT.I DONT SAY THESE THINGS BECAUSE I BELIEVE IN THE BRUTE NATURE OF MAN OR THAT #57

MEN MUST BE BRUTALIZED TO BE COMBATIVE. I BELIEVE IN GOD, AND I BELIEVE IN HUMAN DECENCY. BUT I FIRMLY BELIEVE THAT ANY MANS FINEST HOUR, THE GREATEST FULFILLMENT OF ALL THAT HE HOLDS DEAR, IS THAT MOMENT WHEN HE HAS WORKED HIS HEART OUT IN A GOOD CAUSE AND LIES EXHAUSTED ON THE FIELD OF BATTLE VICTORIOUS. THANK YOU.#58

Thank you.

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