Mega Ace Consultancy

Following are the excerpts of the paper on "Good Corporate Governance: A Game Changer for Sustainable Strategies' presented by Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy Chairperson at the 12th International Conference on Corporate Governance & 3nd Global Conference on Sustainability: Corporate Governance Perspectives & Sustainability Challenges held in London on October 10 -12, 2012. In her paper, Prof. Kumar pointed out that as long as development challenges exist in the economy - issues of demand and supply, conflicts on climate change, limited supply of oil and energy - there will be opportunities for entrepreneurs to find sustainable solutions to meet these challenges.

Prof. Poonam Kumar at the London Global Convention 2012 on Corporate Governance

Global growth is projected to drop to about 3 % in 2012 from about 4% in 2011 due to the weak activity during the second half of 2011 and the first half of 2012. Although experts predict gradual strengthening of the global economy, recent improvements are very fragile.

Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy

Good Corporate Governance: A Game Changer for Sustainable Strategies

The table below shows the growth forecast for various economies. World Economic Outlook 2012-13 ACTUAL 2011 World Output Advanced economies United States Euro Area United Kingdom Japan Emerging economies China India Russia Brazil Source: International Monetary Fund Considering the global economic environment, the World Economic Situation and Prospects 2012 published by the United Nations points out to the failure of policymakers, especially those in Europe and the United States, to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating. The report points out that overcoming these risks and reinvigorating the global recovery in a balanced and sustainable manner poses enormous policy challenges. Most developed economiesEurope and the United States, as well as Japanfind themselves in a difficult economic bind. Their economies have been growing too slowly for too long, making it more difficult to pay for the increasing costs of health care and pensions for ageing populations. In the short term, this so-called no growth or low growth-trap takes the form of resistance to emergency measures. The report, points out that, developing countries on the other hand find themselves in a different bind. On the one hand, they need to protect themselves against volatile commodity prices and external financing conditions, in some cases through more restrictive macroeconomic policies and reserve accumulation, thereby contributing to the lack of global
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FORECAST 2012 3.5 1.4 2.1 -0.3 0.8 2.0 5.7 8.2 6.9 4.0 3.0

FORECAST 2013 4.1 2.0 2.4 0.9 2.0 1.7 6.0 8.8 7.3 3.9 4.1

3.9 1.6 1.7 1.4 0.7 -0.7 6.2 9.2 7.2 4.3 2.7

Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy

Good Corporate Governance: A Game Changer for Sustainable Strategies

aggregate demand. On the other hand, they need to step up investment to sustain higher growth and reorient their economies towards faster poverty reduction and more sustainable production. Sustainability Challenge: Need for Equitable and Inclusive Growth In an increasing globalised world, developed countries have been seeking to leverage on the growth of the emerging economies like India and China. In such an inter-connected economic scenario where a countrys domestic issues are closely aligned into the global socio-political landscape, a key challenge that corporations and governments face today is managing the expectations of the people at large. Today, poverty continues to afflict a large proportion of the worlds population. It is closely linked with unemployment. More than a billion people survive on less than US$ 1 a day and nearly three billion on less than US$ 2 a day. Some 30,000 children die daily as a result of extreme poverty. With over 80 million people getting added to an already overcrowded globe each year the condition continues to get grim. Perennial problems of unemployment, pollution, waste-disposal, epidemics, water-shortages, famine, deforestation and depletion of nonrenewable resources threaten global peace and the eco-system. According to the 2012 annual report titled Global Employment Trends 2012: Preventing a deeper jobs crisis by the International Labour Organization (ILO), the world faces the urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion. Companies based in the developing world have long experience of working with low-income communities, while others are increasingly encountering poverty as they seek new markets. Companies also encounter relative poverty among the poorest sections of society in the developed world, where many cannot afford the products and services that average earners may take for granted. They believe that the vast numbers of people living in poverty today are potential consumers, employees, and suppliers. However, the challenge lies is in ensuring equitable growth and opportunity in the areas and regions that they operate. Corporate Governance at Cross Roads: A Global Challenge Good corporate governance practices are a major challenge for governments and regulators across the world. The subject of corporate governance leapt into global business limelight from relative obscurity after a string of collapses of high profile companies. Enron and WorldCom
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Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy

Good Corporate Governance: A Game Changer for Sustainable Strategies

shocked the global business community with both the scale and age of their unethical and illegal operations. While corporate practices in the US companies came under attack, it appeared that the problem was far more widespread. Since the Enron debacle; across the world, large and trusted companies from Parmalat in Italy to the multinational newspaper group Hollinger Inc., and Satyam in India revealed significant and deep-rooted problems in corporate governance practices. Today, businesses are viewed differently and more attention is now given to the balance-sheets and the numbers it exhibits. As the traditional business concept of creating long-term sustainability takes a back seat, the failures of large and trusted enterprises like Enron, Lehman Brothers and frauds like that of Satyam have shaken the faith of people. Rethinking Effective Governance: Achieving Sustainability A recent working paper published the HBS which investigated the effect of a corporate culture of sustainability on multiple facets of corporate behaviour and performance outcomes found that the boards of directors of High Sustainability companies are more likely to be responsible for sustainability and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information. The study found evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The study found that in High Sustainability firms, Boards of directors perform a monitoring and advising role and ensure that management is making decisions in a way that is consistent with organizational objectives. Top management compensation systems align managerial incentives with the goals of the organization by linking executive compensation to key performance indicators that are used for measuring corporate performance. It also found that High Sustainability firms are characterized by a distinct corporate governance model that focuses on a wider range of stakeholders as part of their corporate strategy and business model. The study predicted that such firms are also more likely to adopt a greater range of stakeholder engagement practices. This is because engagement is necessary for understanding stakeholders needs and expectations in order to make decisions about how best to address them.

Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy

Good Corporate Governance: A Game Changer for Sustainable Strategies

Leveraging High Performance Board for Sustainability In his book Breakout Nations: In Search of the Next Economic Miracles, Ruchir Sharma, points out, the global economic bloom of the last decade has sparked a rise in inequality particularly challenging in developing nations. Whereas, economists would argue that this growth imbalance to some extent is natural in the early stages of economic development; however, inequality can pose a threat to growth if it goes unchecked. The countrys leaders have been working to contain the potential social tensions, mainly by increasing government handouts rather than by widening business and job opportunities. It is in this context that it is important to integrate sustainability into strategic initiatives of Boards & companies. It is especially important because these issues play out over the long term. Most companies creating value through sustainability look first to improve returns on capital. Companies that rigorously pursue sustainability also regularly revisit their business portfolios to determine the potential impact of trends that could lead to new growth opportunities. This calls for the highest level of integrity and performance matrix to govern board and management performance. Creating long-term value for society, calls for ensuring transparency, good corporate governance ethics and a strong corporate culture, all of which are contributing factors for the economic growth of any nation. Moving Beyond Box-Ticking: Improving Governance Practices A frequently heard allegation about Board performances is that Directors are often silent spectators with nominee Directors being unable or unwilling to carry out their monitoring functions. Corporate Governance misdemeanours have also put the spotlight on the role of the Auditors. The Enron debacle took down auditing giant Arthur Andersen and PriceWaterhouseCoopers role as the statutory auditors of Satyam will remain a suspect in the fraud committed by the company. Given todays environment of mistrust, the focus for the Board should be to go a step further beyond box-ticking. They need to make sure that enterprises that they represent are working on the right business strategy that brings long-term sustainability and value for society. Effective Governance Practices: Driving Profits and Sustainability While, high-profile corporate governance failures in developed economies over the years have brought the subject to media attention, the issues have always been central to finance and economics. This makes it doubly important for developing countries to ensure the adoption of
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Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy

Good Corporate Governance: A Game Changer for Sustainable Strategies

effective corporate governance practices since it is central to their financial and economic development. Pursuing strategies for effective representation, one of the key concerns which have been raised is the need to include more women members at board levels. However, much needs to be done in this area. Take the case of India. As a recent survey found women account for over 30 per cent of total workforce of India Inc, but their presence is very low at less than 7 per cent when it comes to the board-level positions at the Indian companies. Although better than a few major countries like Japan and Italy, India is ranked at 30th place in terms of the presence of women directors at the companies' boards. Another report by womens advocacy group Catalyst said that only 16.1 per cent of board seats are held by women in Fortune 500 companies. Emerging Dimensions: Principle-based Corporate Governance Corporations of today are no longer sheer economic entities. They are the engines of national transformation. In an age, where capital flows world-wide, a culture of corporate governance has become the need for the future growth and stability of companies and governments as well. On the other hand, traditional businesses were founded with the concept of creating long-term sustainability and value for the nations economy. The founder sought to create a legacy that he wished to pass on to his future generations. He believed in managing resources and investing them in the most productive manner thus creating a value for both his business and society at large. Being honest was a way of life. Ethics & transparency was the bedrock on which business was established. These were the fundamental principles which were required to build a sustainable business. Conclusion: Social Engagement as a Sustainability Strategy Despite the many challenges that it faces, the global economy has also shown great promise and resilience. In a globalised world, technology has made possible further advances in all fields, from agriculture, to medicine, alternative energy, metallurgy, and transportation. Rapid improvements in global communications has also greatly reduced the costs of international trade, helping the world accrue gains from the international division of labour for raising the living standards of people across the world and reducing income disparities among nations. As long as these development challenges exist in the economy - issues of demand and supply, conflicts on climate change, limited supply of oil and energy - there will be opportunities for entrepreneurs to find sustainable solutions to meet these challenges.

Prof. Poonam Kumar, Chairperson, Mega Ace Consultancy

Good Corporate Governance: A Game Changer for Sustainable Strategies

Businesses are engines of value creation which increasingly depends on integrating social, environmental and economic value drivers. It is an environment where non-financial and intangible assets are significant drivers of corporate performance and where value is often created through collaborative global networks, reshaping traditional boundaries of power, control and influence. This context will increasingly shape board and investor strategies and will frame the governance agenda of the future which will determine future business success. Governance must therefore be increasingly judged by its impact on long-term and sustainable value creation. The need is to encourage companies to create value through entrepreneurism and societal participation. It calls for the creation of good business models and values that place a premium on innovation and creativity to find solutions to some of the grave challenges that modern society faces from environmental degradation to the need to bring about inclusive growth. It calls for the constructive engagement of our youth and channelizing their energies as productive participants of society. This calls for a change in the attitude - the need to adopt more ethical and transparent ways of conducting business along with innovation and creative thinking. There is also a need to develop newer and sustainable models of social Public Private Partnerships that seeks to achieve sustainable growth capable to impacting larger sections of people. It is time that we return to supporting bankable, sustainable projects and nurture corporations and business with strong foundation that are well versed to be managing their risks. It is not all about regulations but some basic ethics of conducting business focusing on the sustainable value that businesses will generate for their stakeholders and for the society at large.