Reference no: EM132897534

Read the case study below and answer the questions that follow.

BOARD DYNAMICS: UNDER PERFORMING BOARDS ARE ALL TOO COMMON The best corporate boards challenge and guide companies to achieve higher levels of performance year after year. But they are all too rare. Instead, as the collapse of Enron, WorldCom shows, companies with weak corporate governance hurtle to their demise. While the spectacular failures get headlines, under-performing boards are all too common-and equally dangerous, as they silently erode shareholder wealth over time. According to Bain & Company's research on sustainable value creation, in a global sample of more than 2,000 companies, very few companies consistently performed well. When rated on three criteria for high performance-more than 5.5 percent real revenue growth per annum, more than 5.5 percent real net income growth per annum and creating shareholder value in excess of the cost of company equity-over a 10-year span, only 12 percent of the firms made the cut. The rest faltered.

Strong, effective boards can help companies avoid trouble by making the right decisions at the right time. Boards that play their role well help companies go from strength to strength, over long periods of time, despite disruptive forces like competition, technology or economic turbulence. However, by that measure, many Indian boards currently fall short: most Indian companies need to raise corporate governance standards as a top priority if they are to be sustainable over the long term. A recent Bain & Company survey in India reveals that even some of the top-performing companies in the country are quite weak in corporate governance when compared with global practices. Worse, boards of many Indian companies with global ambitions are simply not keeping pace with the evolving standards in global corporate governance. For example, while Indian boards hardly ever deal with issues such as CEO performance or CEO succession, many US and European boards hold themselves responsible for grooming leadership. Another key difference: most Indian boards seldom systematically analyse the financial and operational risk their companies face. The best US and European boards, on the other hand, now have formal risk-management processes in place, including a whistle-blower policy and an ombudsman.

Bain's Corporate Governance in India in 2009 survey was conducted in association with International Market Assessment (IMA) India and included more than 100 interviews with directors on the boards of 44 prominent Indian companies, across industries. We also interviewed regulators, commentators, analysts and company secretaries to get deep, granular insights into Indian corporate governance. The two-punch message: many Indian companies are vulnerable due to weak corporate governance, and most Indian boards lag in performance compared with global practices. Let's consider these two issues in more detail.

Why good governance matters

Most Indian boards focus more on meeting regulations than proactively protecting the company's interests. The survey revealed that when it came to structures that are regulated by the law, Indian companies tend to be diligent in checking the boxes. As a result, in areas where Indian regulations are on par with global regulations, Indian corporate governance standards too compare well with global standards. For example, the size of Indian boards-typically 11 board members-matches that of the US (average: 11) and Europe (13). Similarly, the average number of times a year the audit committee of an Indian board meets (5) compares favourably with European (6) and US (9) boards.

But compliance is only a small slice of effective corporate governance. A board that is concerned with compliance alone considers its job done when the company meets the guidelines of the country's securities and exchange watch-dog. Such compliance-led boards have little incentive to focus on long-term sustainability issues. Astrategy-led board on the other hand, uses regulations as a baseline: it then tries to go beyond and help influence the company strategy and guide it down the path of sustained value creation. On a critical issue like signing off on financials, for example, a compliance-led board might be content asking: "Are we accurately reporting the company's finances?'' Strategy-led board members, we find, probe much harder and deeper: "Do we fully understand the financial health and risks of the company? Where should capital be allocated to ensure we maximize shareholder wealth? Is our financial strategy sustainable?"

Currently, the survey shows, Indian boards take little interest in strategy. Often, board members are either diffident about challenging top management, or simply not encouraged to comment on issues such as CEO compensation. This lack of strategic support from the board represents a missed opportunity for Indian companies. Globally, there is ample evidence that good corporate governance brings tangible benefits to companies. A report by the International Finance Corporation (IFC) concludes that "well-governed companies often draw huge investment premiums, get access to cheaper debt and outperform their peers." A Deutsche Bank study of S&P 500 firms shows that companies with strong or improving corporate governance outperformed those with poor or deteriorating governance practices by about 19 percent, over a two-year period.

Indian boards need to improve governance standards not just for the financial benefits-but also to avoid the pitfalls of weak board management. Recent corporate scandals have shaken the faith of domestic shareholders. Increasingly, domestic investors, policy makers and shareholders demand that Indian boards play a stronger role in protecting corporate wealth creation. Our survey finds, however, that much more needs to be done before Indian boards make effective decisions. Clearly, the loose standards in governance that led to Satyam's downfall, could also trip up other leading Indian companies.

Indian companies with global aspirations know they must raise governance standards even more urgently. In some areas-such as the membership of board committees-not only are global regulations more stringent, but also, global investors and shareholders expect the board to play an active role in delivering results. This is particularly true after Enron, when regulators around the world became more active and tightened corporate governance requirements. While the US led the charge in 2002 with the Sarbanes-Oxley Act, the wave of stricter regulations rolled right across the world: Canada (2003); France (2003); Australia (2004); Italy (2005); Japan (2006), et al. For Indian companies expanding abroad-the number of Indian companies listed on US stock exchanges more than tripled from 23 in 2005 to 85 in 2008-meeting global standards in corporate governance is not a choice, it's a necessity.

Extracted from: https://www.bain.com/insights/is-your-board-working/

QUESTION 1

1.1 Globally, there is ample evidence which suggests that good corporate governance brings tangible benefits to companies. Do you agree with this statement? Substantiate your answer using evidence from the case study.

1.2 In light of the case study, critically discuss the characteristics of an effective board. Your response should provide for examples.

1.3 According to the information provided in the case study, do you consider corporate boards in India efficient as per the global standards? Provide solutions on how these can be holistically improved.

1.4 With reference to the various global principles, critically discuss the role and importance of good corporate governance.