Quant Opinion: Full Interview with M. Damodaran

(Last Updated On: May 19, 2011)

Full Interview with M. Damodaran

Why should companies be transparent? What’s in it for them?
M. Damodaran:
If there is something that regulators lose sleep over, it is the lack of transparency. In a complex financial market, being transparent is just the right thing to do for organizations. Transparency is music to the ears of a regulator. It is the most important foundation of a corporate entity. When there is transparency there will be demand for even more.
Sharing, communicating and disclosing are vital to foster good relations. It is something that ought to be addressed on a continuing basis. Disclosures provide information on the basis of which stakeholders take important decisions like: Do I stay invested in a particular company? Should I continue to do business with a company?
All of these are independent decisions that people take based on disclosures organizations make in the public domain. The famous Justice of the US Supreme Court, Louis Brandeis, once said “Sunlight is the best disinfectant.”

Why is a culture of corporate governance important?
M. Damodaran:
Companies need to understand the value of good governance. They need to appreciate the fact that good governance is not something you do to keep other people happy. Good governance is critical because it enbales better decision making and conduct at all levels of the organization. It automatically ensures that you are protecting the interest of all stakeholders. And when you take care of the interest of all stakeholders, over a reasonable period of time the company generates value on a sustainable basis. That is what distinguishes the good companies from the bad. If your company is run on the principles of good governance, the market gives you a governance premium.
Good governance is good conduct at the corporate level. To ensure good governance, you need to have clearly laid out rules, practices and value systems that are widely subscribed to. All processes should be transparent within the company. When that happens, people have more confidence in the company and that confidence translates into better value for the company.
There is a certain level of discomfort that people have about companies that are not known to be governed well even if their financial results look good. So I think people must recognize that there is inherent value in good governance.

How can organizations achieve that?
M. Damodaran:
Companies can usher in a culture of good governance by following some simple principles. It starts with having a good board of directors. You need people who will give you honest advice, not people who will tell you what you want to hear but what you ought know. They should not endorse the promoters or management. They should not rubberstamp a management’s decisions. Only then will organizations see more transparency, more disclosures, more informed and enlightened debate at the board level.
Different alternatives will get examined in the interest of the company. I am not for a moment saying that the role of the board is to oppose management. It is their job to evaluate the management’s proposal dispassionately and factor in the interest of all the stakeholders in a company.If you are transparent with your business partners, they will wish to do business with you on a long-term basis. That applies to your workforce as well. Every stakeholder at all levels of the organization should know how business is run. This will be an ideal situation where every stakeholder’s interest is addressed. To achieve this, you need to have processes that are widely publicized. You also need to ensure that there isn’t too much concentration of power. All of this can be addressed within the company in a manner specific to the company.

How can companies contribute to healthy governance?
M. Damodaran:
If the task of ensuring governance was left to regulators alone then we would be subscribing to a system which is run only on the basis of deterrence and not on the basis of people recognizing the value inherent in good governance. It has to be a shared responsibility. There ought to be some effort on the part of the company and its stakeholders and some effort on the part of the regulators. Each one has his or her work cut out.
Companies have to do their bit by ensuring that disclosures are complete, correct and current. Here, I must admit that if there is something that bothers regulators it is the fact that there aren’t enough disclosures. It is important to do the right things that enhance transparency in the financial markets of the world. A disclosure must be contemporaneous, which means that at the time when the event happens it must be disclosed. Delay will defeat the very purpose of a disclosure. The major problem in any market -whether it is equity or any other-is the asymmetry of information. What regulators and companies need to do is to work together to ensure that asymmetry of information is reduced. Let’s be realistic: It will never be eliminated. But it must be reduced to the extent possible.

What is the role of IT in ensuring transparency?
M. Damodaran:
The role of IT is extremely critical. Better governance and transparency is ensured by systems that are robust and non-discriminatory, systems that every one understands and works with. And IT helps in configuring these systems. It helps in designing processes that are strong, fast, robust and transparent.
The more you have manual interventions, the more there will be problems. Technology applications ensure that you reduce manual intervention and subjectivity. IT ensures better practices, faster dissemination of information, and better manipulation (in a positive sense) of figures. It supplements the efforts of others to ensure that there is a climate of good governance aided by faster information flow.



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