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Published on January 9, 2009

Author: aSGuest9789

Source: authorstream.com

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ICRA PRESENTATION : ICRA PRESENTATION CORPORATE GOVERNANCE RATING Conceptual basis : Corporate Governance is both a dynamic system and a code of standards. A system that is measured by the quality of inter-relationships…between companies and directors, between directors and auditors, between auditors and financial management and ultimately between information and investors - Mr Arthur Levitt Conceptual basis 2 Slide 3: “The Foundation of any structure of Corporate Governance is disclosure. Openness is the basis of public confidence in the corporate system, and funds will flow to the centres of economic activity that inspire trust.” - Sir Adrian Cadbury Transparency & Disclosures “As more countries move to an equity culture, high quality financial information becomes the currency that drives the marketplace” - Arthur Levitt 3 What is good corporate governance ? : Systems and procedures adopted and followed that ensure all stakeholders share equally in the success (or failure) of a firm…….(Moody’s) What is good corporate governance ? 4 What, if any, are the benefits of good corporate governance ? : What, if any, are the benefits of good corporate governance ? According to OECD, only companies with credible and well understood corporate governance practices would be able to attract long-term capital However, financial theory is yet to establish the linkage Empirical evidence is available McKinsey Investors Opinion Report Credit Lyonnais Securities study Business Week ranking of best boards 5 Does better corporate governance deliver higher shareholder returns ? : Does better corporate governance deliver higher shareholder returns ? To ascertain this, McKinsey & Co. in cooperation with the world bank conducted a series of surveys The survey gathered response from over 200 institutional investors managing approx. US$2.5 trillion in assets. 40% of the respondents were based in the U.S., balance in Europe, Asia and Latin America Source: McKinsey Investor Opinion Survey- June 2000 6 Most investors say that board practices are at least as important as financial performance : Most investors say that board practices are at least as important as financial performance Source: McKinsey Investor Opinion Study Q: In evaluating companies for potential investment, how important are board practices relative to financial issues? 7 Most investors would be willing to pay more for the shares of a well-governed company : Most investors would be willing to pay more for the shares of a well-governed company Source: McKinsey Investor Opinion Study Q: Would you be willing to pay more for a company with good board governance practices? 83 89 81 17 11 19 8 The premium that investors would be willing to pay is significant : The premium that investors would be willing to pay is significant Q What percentage premium do you estimate you would be willing to pay for the stock of a well-governed company? Source: McKinsey Investor Opinion Study 9 Key Findings of CLSA study ……I : Key Findings of CLSA study ……I Near Perfect Correlation between corporate governance quartiles and ROCE / ROE 10 Key Findings of CLSA study ……II : Key Findings of CLSA study ……II Strong Correlation between corporate governance quartiles and average share price performance 11 Why do investors care about Corporate Governance ? : Why do investors care about Corporate Governance ? Financial reports and other disclosures can be trusted Well governed companies mitigate ‘non-business’ risks Believe that corporate performance in the long run is correlated with CG Fad value, tag along. 12 Conceptual basis : Agency costs inherent in separation of ownership and control Professional managers have enormous powers How do you ensure that the powers are not misused? What control do the ‘owners’ have on the management ? Where shareholding is not dispersed , Corporate Governance is still equally important for protection of minority shareholders rights and balancing the conflicting interests of stakeholders Conceptual basis 13 Framework for Corporate Governance Ratings : Framework for Corporate Governance Ratings 1 5 4 3 2 Board of Directors Other Creditors Shareholders Executive Management Other Stakeholders 14 Framework for Corporate Governance Ratings : Framework for Corporate Governance Ratings 15 Key Variables in the Rating Process : Key Variables in the Rating Process Ownership structure Governance Structure and Executive Management Processes Board Structure and Processes Stakeholder Relations Transparency & Disclosures Financial discipline Emphasis on substance over form…... Compliance with regulations is only the starting point….. 16 ICRA’s Corporate Governance Rating Scale : ICRA’s Corporate Governance Rating Scale CGR1 – Highest level of corporate governance CGR2 – High level of corporate governance, but not as high as in CGR1 CGR3 – Adequate level of corporate governance CGR4 – Moderate level of corporate governance CGR5 – Inadequate level of corporate governance CGR6 – Poor level of corporate governance 17 A sign of ‘+’ may be added as a suffix to the rating symbol for all categories except CGR1, to indicate the relative position of the company within the group represented by the rating symbol ICRA’s SVG Rating Scale : ICRA’s SVG Rating Scale SVG1 – Highest category on composite parameter of stakeholder value creation and management as also corporate governance practices SVG2 – High category….. SVG3 – Adequate category….. SVG4 – Moderate category…... SVG5 – Unsatisfactory category…… SVG6- Lowest category….. A sign of ‘+’ may be added as a suffix to the rating symbol for all categories except SVG1, to indicate the relative position of the company within the group represented by the rating symbol 18 Linkage of CGRs with Credit Ratings : Linkage of CGRs with Credit Ratings some relationship but no direct linkage with credit ratings credit ratings is a measure of credit risk. Determinants are: business outlook, competitive position, operational efficiencies, financial position CGR is an assessment of management conduct, its fairness and transparency Thus a high corporate governance rating does not necessary imply high credit rating. Though companies with high credit ratings are generally expected to have acceptable level of corporate governance 19 What CGR is not? : What CGR is not? CGR is not intended to be an opinion on specific financial obligation capital market valuation future business outlook business competitiveness operational performance CGR is not an audit CGR is not to be interpreted as an indicator of statutory compliance 20 ICRA’s Corporate Governance Ratings(CGR) : ICRA’s Corporate Governance Ratings(CGR) mandate driven, not unsolicited, public ratings - disclosed only on acceptance confidential ratings - company may accept and disclose only to select entities all accepted ratings subject to regular surveillance exit option with a notice of 1 year 21 ICRA’s CGR process : ICRA’s CGR process Meetings and discussions with board members (including independent & nominees members) key top management personnel key shareholders auditors other financial stakeholders lenders and bankers 22 CGR process …. Contd. : CGR process …. Contd. analyze information such as annual reports intra-year financial reports MIS Reports audit reports prospectus/letters of offer filings with statutory authorities records/ minutes of AGM/EGM agenda papers & minutes of board meetings records of penalties/fines/violations 23 Benchmarking …. : Benchmarking …. Benchmarking with national and international best practices, wherever possible For example, in case of Board Structure and Processes, the recent NYSE suggestions for reforming board structure can serve as a a benchmark Relevant provisions of Sarbanes Oxley Act International Accounting Standards For transparency and disclosures, benchmark could be software companies listed in the NASDAQ 24 What will drive Corporate Governance in coming years ? : What will drive Corporate Governance in coming years ? Force of competition Young, professional companies coming to the fore. Role of Institutional Shareholders / FIIs Likely entry of foreign pension funds Take over threats for companies which destroy value Ability to access US markets Capital Account Convertibility Source :The Tide Rises Gradually - Onkar Goswami 25 Accepted Ratings : Accepted Ratings Infosys Technologies Limited CGR1 ITC Limited CGR2 Godrej Consumer Products Ltd CGR2 Godrej Consumer Products Ltd. SVG2 Esab India Limited CGR4 NOTE : ICRA has assigned 2 more (Total 7 ) CGR Ratings which are yet to be accepted 26 Slide 27: Thank You 27

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