BE2G Matrix

Corporate DisclosureThe act of releasing all relevant information pertaining to a company that may influence an investment decision.

IntroductionRole of capital market in the economyInformation is the key to the effective operations of the capital marketInformation is needed by investors and creditors for making rational economic decision Further, This information should help them to assess the amounts, timing and uncertainty of future cash flow.-Conceptual framework, FASB

Why Disclosures ?Lack of information leads to The Lemons problem and the ultimate breakdown of the capital market Adverse selection problems George Akerlof Signaling theory - Michael Spence Quality financial reporting reduces the information asymmetry and facilitates the proper functioning of the capital market

Disclosure & TransparencyCorporate Governance loses its meaning without a fair and transparent disclosure. Transparency refers to creation of an environment whereby the decisions, conditions and actions are made visible, accessible and understandable. As opposed to opaque, transparency essentially means easy availability of the information pertaining to working of a corporation. Disclosure refers to the process and method of providing information. Disclosure has no meaning unless there is timely dissemination

Empirical studies suggest four specific reasons to managers to make disclosures over and above those required by regulation:To lower the agency costs or contracting costs because of information asymmetry;To signal the actual value of firms securities to the market so that its cost of capital is reduced;To provide additional information that is not available through mandatory reporting so that investors can reduce their cost of transacting in the firms securities andTo reduce litigation costs.

Corporate Disclosure EnvironmentMarketForces

Cost of Disclosures

Voluntary Disclosures

Regulatory Environment

IndustryPractices

Mandatory (required) Disclosure

Corporate Governance

Voluntary Disclosures Are those that are left to the discretion of the company, the level of which is determined by the managers/ SHs by balancing the benefits and costs of disclosure.Superior in the hierarchy of disclosure environmentBenefits of voluntary disclosuresReduction in the cost of capitalPromote more liquid/ efficient capital markets and efficient allocation of resourcesServe managerial interest by reducing the possibility of hoetile takeovers, to ward off SH litigation and to correctly signal managerial talent.Other benefits include large analyst following, reduction in the cost of investors search for the information thus reducing transaction costsHowever there are costs associated with disclosuresDirect costs of producing information Indirect costs of loss of proprietary business intelligence to a firms competitors leading to loss of competitive position in the market.

Mandatory/ Required DisclosureThose required by law/accounting standards/listing regulationsAre based on investor protection and capital market considerations and are based on the existence of market imperfections.The presence of externalities and the public good nature of disclosed informationThe reduction of market wide costs through regulation In case of distorted disclosures, imposing strict and enforceable sanctions in a regulated disclosure regime

Mandatory DisclosuresBenefitsBetter informed SHs which enable them to exercise their voting powers more effectively (particularly with Large Shareholders) create positive externalitiesTo force managers to share information that would bring about the information parity between the management (specifically board) and shareholders curtail the opportunism for earnings mgmt, and RPTsIncreases the efficiency of capital markets with share prices reflecting true value of the firm which in turn increases the effectiveness of market for corporate control, reduces the riskiness of equity-linked compensation schemes, improves capital allocation, and lowers the cost of external finance.

Mandatory DisclosuresCostsFinancial costs of setting up a regulatory systemOpportunity costs associated with human capital

Q & Q of DisclosuresSome disclosures are quantitative in nature such as financial statements, RPTs and Segment reporting while some are qualitative in nature such as MD&A, notes and supplementary schedules and CEO/CFO certification Wipro 13 pages in 1947 to 236 in 2012-13

Quality of DisclosuresDesirable disclosures should disclose information that are timely, relevant, verifiable, reliable, unbiased, comparable and consistent (FASB)Particularly in respect of financial reporting, quality entails setting up of accounting and auditing standards.Accounting standards accords credibility to the disclosed information which forms the basis of designing and enforcing contracts, such as compensation, debt covenants and enforcement of securities laws protecting investor rights.Principle based vs rule based approaches

UNCTAD Guidance on Good Practices in Corporate Governance DisclosureFinancial disclosuresNon-financial disclosures - Company Objectives, Ownership and Shareholder Rights, Changes in Control and Transactions Involving Significant Assets, Governance Structures and Policies, Members of the Board and Key Executives , Material Issues Regarding Stakeholders, and Environmental and Social Stewardship, Material Foreseeable Risk Factors, Independence of External Auditors , Internal Audit FunctionGeneral Meetings, Timing and means of disclosure and Good practices for compliance

Disclosure regime in IndiaCompanies ActClause 49Accounting standrads

Companies ActList of directors, the directors report, annual audited accounts, financial statements, segment reporting, RPTs, auditors report, notes to accounts, employee particulars, significant accounting policies.Annual reports to be sent to SHs, SEs, MCA, and RoC (Sec 210(1))Rationalisation of Schedule VI RPTs interested directors sec 297, 299 and 300Setting up of audit committees Sec 292 AConduct of AGM Sec 166 and timings and means of disclosure

SEBI - Clause 49Separate section on CG in annual reportsIndependent directors, constitution of independent audit committesDisclosure of material information to SHs pertaining to remuneration of directors, board procedures, MDA, RPTs, appointment and re-appointment of directors, disclosure of accounting treatment, risk mgmt, proceeds from public issues, among others

SEBI - othersClause 35 - Disclosure of ownership and control structure in a prescribed formatSEBI (Substantial Acquisition of Shares and Takeovers) RegulationsSEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONSSEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS

Accounting StandardsSec 211 (3C) mandatory for all companies to follow the standards notified by GoI on the recommendations of NACAS (National Advisory Committee on Accounting Standards)Principle-based ASs guided by prudence, substance over form and materiality. Specific to CG disclosures AS 17, AS 18 and As 21

EnforcementIn the absence of strict enforcement, investors will demand unusually high premium for supplying external finance, increasing the cost of capital, hindering the development of financial market and subsequently resulting in lower economic progress of the countryFirms faced with weak enforcement environment will respond by moving to more concentrated ownership structures to signal investors that their interest coincide with that of owners/managers.

This ownership concentration results in entrenchment of management, expropriation of minority SHs, weakening of the market for external control, and to a lower standard of corporate governance this will hinder the flow of outside capital and hampers economic growth.

Private vs. Public EnforcementPrivate enforcement initiatives of private individuals to supply information about violations and to use the legal framework for enforcement (DLF case (Kimsuk Krishna Sinha))Public enforcement involves the government or other public authorities in enforcement (Sahara Case, Satyam, NSEL, 2G)

Private EnforcementOne aspect is self enforcement/ self- governanceThree types of private enforcements Unilateral, Bilateral and multilateralThe scope can become limited when private parties do not have necessary incentives or if possibility of reprisal from violator

Public enforcementThree relevant issuesThe inter-relationship between the extensiveness (the scope and detailing in the written law) and effectiveness of lawThe positive theory of enforcement and the related effectiveness and efficiency of enforcement institutionsThe relationship between laws, corruption and enforcement

Investor Protection

Shareholder protectionThe corporate governance framework should ensure the equitable treatment of all shareholders, including minority shareholders with respect and not prejudice to the rights of all investors. All shareholders should have the opportunity to obtain effective redress for violation of their rights. Boards should do their utmost to enable shareholders to exercise their rights, especially the right to vote, and should not impose unnecessary hurdles.

Disciplining the Dominant SHPSUsMNCs Family controlled

Protecting Minority ShareholdersTCI vs CILVeritas on RCom, Kingfisher Airlines, DLF and India Bulls

Quite predictably, the minority SH remain at a serious disadvantage vis-a-vis the promoters. Promoters may claim that since they own a majority stake in the Company their interest is equally (or more) affected than those of the minority shareholders. Maybe, the argument has some merit. But, are the minority shareholders so unimportant that Company's do not even share details & justifications for large and important transactions like hiving-off of business units (Siemens) or restructuring of businesses (Sterlite, Vedanta Resources Plc's acquisition of a majority stake in Cairn India Limited for $8.48 billion) among others.

There are also good examples of making the transaction a transparent one, based on which a shareholder can appraise his/her investment. The way to do this was shown to us by Tata Motors, where most of the details of its takeover of JLR were made available to shareholders.The question is not to doubt a companys intentions, but its a question of being transparent with the shareholders

What can be done?An attempt to amend Companies Bill 1999 in 2000 to give small SHs mandatory representation on the board above a certain size was scuttled.Sections 397/398 of Companies Act 1956 can approach courts of law, CLB, arbitral tribunal.Sections 391 to 396 of The Companies Act, 1956 guide the legal procedure for corporate strategies, including mergers, amalgamations and reconstructions. Sections 391 to 394 inter-alia give the Court the power to sanction, enforce and supervise a compromise or arrangement between a company and its creditors/members subject to certain conditions.

The Courts, while approving the scheme, follow a judicious approach of publishing a notice in the newspapers, inviting objections, if any, against the scheme from the stakeholders. Any interested person, including a minority shareholder may appear before the Court.There have been occasions when the minority shareholders have raised objections and have succeeded in preventing the implementation of a scheme of arrangement.What can be done?

Minority SHs

In the 2011, 3 instances where management had to withdraw resolutions after minority shareholders expressed dissent. These dissensions occurred at lesser known companies KGN Industries, Seamec, ARSS Infrastructure, and were not by institutional investors.

Shareholder ActivismIn 2014, Tata Motors proposal of payment of remuneration to two of its Executive Directors and the Managing Director in event of inadequate profits was rejected by public shareholders.Many proposals of United Spirits to enter into related party transactions with its promoter Diageo Plc and other related entities were rejected by its shareholders.Siemens proposal for selling the metals technologies business to a 100% subsidiary of Siemens AG, the German parent company, was rejected by shareholders

Institutional Activism Foreign institutional investors own 18% and domestic institutional investors own 11% of the top 500 Indian companies.(a) Akzo Nobel India: On Feb 7th 2012, at a court convened meeting of shareholders, many institutional investors either voted against or abstained as a protest against the amalgamation of 3 unlisted entities with the listed entity. Though the resolution was passed, the post-vote analysis shows that more than 45% of non-promoter votes were against the resolution. If those institutions who abstained had cast their vote against, it would have defeated the resolution and set a precedent. (b) TCI vs Coal India - Probably for the first time in Indian corporate history has an institutional investor threatened to sue individual Board members of a listed entity - The hedge fund is claiming over Rs 2,12,250 crore in damages on behalf of all shareholders, the figure it claims is the value of losses suffered by the company by pricing coal well below market prices between November 2010 and March 2013.

ActivismBoards of Sesa Goa and Sterlite India approved a merger of the two companies along with Vedanta Aluminium Limited (VAL). Proxy firms highlighted the facts that VAL had heavily leveraged balance sheet and a number of human rights issues. But, it went through

Activism Proxy Advisory FirmsInstitutional Investor Advisory Services India Ltd (IIAS), which advices institutions on corporate issues, has advised shareholders of Infosys, which held its annual general meeting in last June, to vote against a resolution seeking the reappointment of its statutory auditors BSR & Co.The IIAS report has also expressed reservations over one of the independent directors Omkar Goswami having stayed on the board for 12 years.IIAS also came out with a report criticising Piramal Healthcare for its lack of transparency in its deal to sell its formulations business to Abbott of USA which did not focus on the tax outgo.Stakeholders Empowerment Services (SES), advises the minority shareholders of WIPRO on its hiving-off of its non-IT businesses into a separate company. Naveen Jindals 73cr pay at Jindal Steel and Power (without remuneration committee).

UK based Aberdeen Asset Management, sued Mahindra Satyam is seeking damages in excess of $150 million for losses suffered in B Ramalinga Raju 2009 Satyam scam.A lone minority shareholder of Tainwala Polycontainers Ltd (TPL), Dinesh V Lakhani, had apparently forced the company to call off its merger plans with Tainwala Chemicals and Plastics (India) Ltd (TCPL).There have however been some instances when shareholders holding a small number of shares, have made frivolous objections against the scheme, just with the objective of deferring the implementation of the scheme. The courts have, on a number of occasions, overruled their objections. But Companies had to bear the consequences in the form of time and cost over-runs.

The capital market regulator, SEBI is looking at ways to enhance the involvement of non-controlling shareholders in the decision-making processes of firms through institutionalization of the voting system, and their participation in general meetings through electronic means.Developing takeover codes so that the minority SHs interest are protected.

Guidelines for good disclosureStewardship of the company strategic planning process, principal risks, succession planning, communications policy and integrity of internal controlBoard independenceIndividual unrelated directorsNominating committeeAddressing the boards effectivenessOrientation and education of directorsEffective board sizeCompensation of directors

GuidelinesCommittees and outside directorsApproach to corporate governancePosition descriptionsAudit committeeOutside advisors

OECD Principles of Corporate GovernanceI. Ensuring the Basis for an Effective Corporate Governance Framework

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.

II. The Rights of Shareholders and Key Ownership Functions

The corporate governance framework should protect and facilitate the exercise of shareholders rights.

III. The Equitable Treatment of Shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

IV. The Role of Stakeholders in Corporate Governance

The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

V. Disclosure and Transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

VI. The Responsibilities of the Board

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and the shareholders.

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