The Executive Committee of TQMS made a commitment to the Group Chairman to include Corporate Governance in TBEM, in a step-by step manner. Pilot study was conducted on two of the Group Companies in the year 2003-04 on the basis of the criteria specifically designed to assess the Corporate Governance related processes. While the criteria was mainly based on the Malcolm Baldrige criteria, the team set up for the task, looked into various other models / methodologies in vogue then for assessment on compliance to Corporate

governance to make it more meaningful and comprehensive. Post the pilot assessment, findings and assessment methodology was deliberated in the Steering Committee specially set up for the purpose. Now, in 2005 it is decided to conduct Corporate Governance

assessment for some more Group Companies based on the criteria, now modified to include the changes so far in the Malcolm Baldrige criteria.

Why the focus on Corporate Governance and Social Responsibility

Echoing the views of President of The World Bank, King Report on Corporate Governance, March 2002 states "company remains a key component of modern society. In fact, in many respects, companies have become a more immediate presence to many citizens and modern democracies than either Government or other organs of society". Therefore, it is increasingly being felt that proper governance of companies is as critical for sustained public (investors, customers, suppliers, partners, employees, regulators and community) trust and wealth generation as is proper governance of countries for socio economic development.

It is often said that while 19th century was the century of entrepreneurship and 20th century was the century of Management, 21st century shall be the century of governance. The realization has not dawned suddenly but has been growing with increasing evidence of corporations being gripped by what King Report calls the three corporate sins that of "Greed", "Sloth" and "Fear". Greed essentially refers to maximizing short term profits (to the advantage of management of the day) at the cost of long term investment, while sloth refers to the loss of enterprise and innovation within large corporations and fear refers to the increasing tendency of managements of the day to be subservient to investors needs alone at times at the cost of several other important stakeholders (customers, suppliers, partners, employees, regulators and community) which consequently results in asset (tangible and intangible) attrition. There is thus a case for institution of systems to check these “sins” that a corporation may succumb to. Corporate Governance systems though not a panacea for all these ills, provides a mechanism for Boards to be vigilant, identify and check where necessary, the emergence of any of these ills.

In line with the emergent thought articulated above, Corporate Governance is increasingly being seen not just as a mechanism to ensure accountability (where one is liable to render an account) but also as a mechanism to demonstrate responsibility (where one is liable to be called to account). Where formerly Boards sought only a “legal” license to operate, today Boards demand also a “social license” to operate. Social license is manifest in the emphasis one sees on management of issues like industry and market standards, industry reputation, investigative media, customer attitudes, suppliers, employees, investors, communities (local, national and international), ethical pressure groups, public opinion, public confidence and several other similar issues.

The emphasis today is on balancing the need for performance (short run) and conformance (to the expectations of various other stakeholder groups). This can be achieved only through adoption of an inclusive approach where relevant stakeholder groups are identified and

engaged on a continual basis. The current governance paradigm, where transparency is inversely proportional to trust (less the trust a corporation commands, more is the demand for transparency from it), is untenable simply because infinite transparency also does not guarantee high trust. There is thus a need for a paradigm shift and graduation to a new paradigm, wherein trust is built through a process of stakeholder engagement (being aware of, sensitive and responsive to stakeholder concerns) or involvement. This is a paradigm that has a direct relationship between public trust and engagement, where higher is the level of engagement, more is the public trust.

Stakeholder engagement has its own inherent costs and in this era of global competition, the oft asked question is, “Is it worthwhile incurring such additional operational costs?” In response to this warrant, McKinsey & Co. carried out a study in 2000 (prior to the several

Governance related scandals that rocked the Global community in recent years) to assess if governance really adds any value. The salient outcomes of the study indicate that:

• 84% of managed funds are willing to pay a premium on share price for governance;
• 75% feel that Board practices are as important as financials;
• The premium varied from 18% in UK to 22% in USA and 27% in Indonesia;

It is evident from above that Managements can add significant shareholder value just by institution and demonstration of good governance in the corporation. In the changed paradigm, good governance encompasses not just Board Practices but also a clear demonstration of commitment to social responsibility, business ethics and balancing value for all stakeholders. The inclusion of Corporate Governance related processes in Baldrige Criteria is thus a recognition of this fact and there is an increased emphasis on Corporate Governance and Social Responsibility.

Corporate governance is considered an important instrument of investor protection, and it is therefore a priority on SEBI's agenda. SEBI has been constantly working toward improving the level of corporate governance in the country and in view of the stage of development of the capital market, SEBI considers it imperative that the adoption of globally acceptable practices of corporate governance be accelerated in India. This would ensure that the Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world.

The spotlight, in India, was focused on Corporate Governance first by CII when it published its Desirable Code of Corporate Governance, a voluntary code, in April 1998. Subsequently, the Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of Corporate Governance.

The first formal legal framework on Corporate Governance was established by SEBI in 2000 based on the recommendations of the Kumar Mangalam Birla Committee report, when a new clause 49 was introduced into the Stock Exchange Listing Agreement. SEBI believes that efforts to improve corporate governance standards in India must continue. This is because these standards are themselves evolving, in keeping with market dynamics. Past events worldwide, primarily in the United States, have renewed the emphasis on corporate governance. These events have highlighted the need for ethical governance and management, and for the need to look beyond mere systems and procedures. This will ensure compliance with corporate governance codes, in substance and not merely in form.

SEBI, therefore, believed that a need to review the existing code on corporate governance arose from two perspectives, (a) to evaluate the adequacy of the existing practices, and (b) to further improve the existing practices. The SEBI Committee on Corporate Governance (the "Committee") was constituted under the Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The committee had submitted its report on 8th February 2003.

A reading of the Kumar Mangalam Birla Committee Report and Narayana Murthy Committee Report indicates that in line with the global trend, emergent thought and consequently the regulations pertaining to Corporate Governance in India also, shall increasingly focus on Ethics, Integrity and meeting the expectations of not just Shareholders but also other Stakeholders.