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ROLE OF INSTITUTIONAL INVESTORS IN ENFORCING CORPORATE GOVERNANCE IN FIRMS

ROLE OF INSTITUTIONAL INVESTORS IN ENFORCING CORPORATE GOVERNANCE IN FIRMS. Yezdi Malegam Goa. PLAN. Conceptual Base Corporate Governance in India Role of Institutional Investor. MAJOR IMPERATIVES. Growing dissatisfaction with financial statements Growing dissatisfaction with boards

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ROLE OF INSTITUTIONAL INVESTORS IN ENFORCING CORPORATE GOVERNANCE IN FIRMS

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  1. ROLE OF INSTITUTIONAL INVESTORS IN ENFORCING CORPORATE GOVERNANCE IN FIRMS Yezdi Malegam Goa

  2. PLAN • Conceptual Base • Corporate Governance in India • Role of Institutional Investor

  3. MAJOR IMPERATIVES • Growing dissatisfaction with financial statements • Growing dissatisfaction with boards • Changing profile of the shareholder • Birth of knowledge society • Competition for larger share of international funds

  4. MODELS • ‘Outsider’ model – Anglo American • ‘Insider’ model – European • ‘Founding family’ model – East Asian

  5. BASIC PRINCIPLES • Accountability • Transparency • Equality of treatment for all stock-holders

  6. KEY PLAYERS • Management • Board of Directors • Shareholders

  7. ATTRIBUTES OF BOARD MEMBERS • Independent of management • Minimum level of financial literacy • Some members to have knowledge of the business • Willing to devote necessary time and attention

  8. MAJOR PROVISIONS OF THE CODE • Composition of Board • Formation of Committee • Audit • Investor Protection and Grievance • Management Analysis and Discussion • Other Disclosures • Matters which the management must mandatorily place before board

  9. OTHER MAJOR SEBI INITIATIVES • Disclosure in Offer Document • Unaudited quarterly financial statements • Half yearly reviews of financial statements • Accounting Standards • Insider Trading Code • Take-Over Code

  10. DIFFICULTIES IN COMPLIANCE • Applicable only to listed companies • Enforcement through listing agreements • Compliance in form but nor always in substance

  11. DIFFICULTIES IN COMPLIANCE …2 • Some common abuses • Non-executive directors not really independent • Inter-group advances / investments with related parties • Investments in non-core assets

  12. ROLE OF THE INSTITUTIONAL INVESTORS • Do institutional investors need to get involved? • What should be the nature of their involvement? • How far have they been involved?

  13. INVOLVEMENT OF THE INSTITUTIONAL INVESTORS - Pro • Significant stakes in companies • Can exercise significant influence on promoters and management and prevent abuses • Better access to information and better monitoring capabilities • Significant positive correlation between corporate governance and stock market performance

  14. INVOLVEMENT OF THE INSTITUTIONAL INVESTORS – Pro …2 • Research studies show countries and companies with weak corporate governance suffer larger collapses when hit by adverse shocks and are subject to greater volatility • Major influence in attracting FDI

  15. INVOLVEMENT OF THE INSTITUTIONAL INVESTORS – Con: • Investment objectives and compensation system discourage participation • Conflict of interest with primary fiduciary responsibility to own investors and beneficiaries • Investors like MFs have short term performance measurement which works against active monitoring

  16. NOMINEES ON BOARDS INEFFECTIVE • Poor selection • No formal reporting system • Inadequately remunerated • No clarity of role • Unwilling to accept responsibility • Generally averse to risk taking

  17. ACTIVE ROLE SHOULD ENSURE • Board members have adequate experience and are truly independent • Executive remuneration, particularly for family members, is not excessive • Early warning signals are detected from wealth of information made available to shareholders

  18. ACTIVE ROLE SHOULD ENSURE …2 • Companies funds are not diverted to non-core activities or for benefit of related parties • Institutional investors lead shareholders in demanding corrective action where such action is warranted

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