"With competition raising the bar for survival, it is parameters like corporate governance that will set firms apart", says Mr. Kumar Mangalam Birla.

There can be no denying that the dictates of liberalization and globalization, and the growing role of institutional shareholders have brought Corporate Governance issues to the fore. Today, many Indian companies are restructuring, raising capital overseas and listing their shares on foreign stock exchanges and all this ferment has led towards a sharper focus on Corporate Governance. Many of the international best practices have been adopted - and adapted - and encapsulated in a SEBI code, which is statutory and applicable to all listed companies.

If we look overseas, the experience of some countries does reinforce, in a dramatic way, the case for sound governance. In the US, in particular, deficiencies in governance structures often resulted in extreme battles for corporate control, battles that, more often than not, proved destructive - for companies, employees and shareholders. This degree of conflict led to loss of jobs and misallocation of capital, and forced sacrifices in vital areas such as R&D. Many takeover attempts were warded off by tactical means that were even worse - poison pills and scorched earth defenses, and loading up on too much debt, putting the corporation's very survival at risk. The best way we can avoid coming to such a pass is to pre-empt it, by having an adequate corporate governance framework in the first place.

That is the negative case for corporate governance. Let me state the positive case. Stated simply, corporate governance is good for companies. Institutional investors and CEOs place a valuation premium on companies perceived to have effective corporate governance.

There was a study carried out, in 1996, by McKinsey & Co. and Institutional Investor,Inc., which covered over 100 major institutional investors, CEOs, and senior executives from firms whose average sales were US$ 2.3 billion. The institutional investors surveyed had total assets under management of US$ 840 billion.

Investors were asked to compare two well performing companies. Next, they were asked if they would pay more for the stock of one of those companies if it were well governed. Two-thirds of the investor group said that they would pay more for well-governed companies and among those willing to pay more for good governance, the average premium specified was a huge16 per cent.

The non-investor group - CEOs and senior executives - was also asked whether they were willing to pay more for the shares of well-governed companies. Again, around two-thirds said that they would be willing to pay more. The valuation premium they were willing to pay was higher - at 24 per cent. The higher premium specified by corporates is hardly a surprise - given that their perspective is that of longer-term investors.

Why were the respondents willing to pay a premium for good governance? In their view a company with good governance would turn in a superior performance over time, which would result in higher valuations. Importantly, good governance tended to reduce risk perceptions - there was less likelihood of 'bad things' happening to the company. The question then is, how can good corporate governance be a competitive tool. First and foremost, corporate governance cannot work in isolation. It has to be backed by a credible strategy and good performance. Good performance with good governance, is a winning combination.

How does this happen? A well-constructed governance structure enhances a company's competitiveness. The initial impact is greater transparency and more effective oversight, which increases investor confidence. A higher investors confidence level flows through into a higher valuation. Companies that enjoy higher valuations find it easier to access capital, on terms that are finer. Better valuations also provide a 'currency' that makes it possible to reward talent. Acquisitions also become easier, without having to add too much debt or unduly dilution interests of existing shareholders.

A high valuation is also a powerful effective deterrent for warding off takeover attempts. In short, a high valuation, builds a moat around the company. It provides a wall of defense, which provides management the space to focus better on addressing issues that help make the company competitive over the long haul. When a company commands a valuation premium, management has just that much less fire-fighting to contend with. It can turn its mind to what's truly important.

Of course, the rewards of good corporate governance go much beyond valuations. Companies, which are perceived to be governed well also enjoy a good image. Talent is drawn to organizations that radiate a positive image. Customers and suppliers want to do business with such a company. Communities want a good corporate citizen in their midst. Good image and good citizenship often tip the scale in critical situations.

Finally, let's face it - the minimum threshold for just staying in business is getting higher by the day. Cost competitiveness, strong brands, high levels of service, a well-defined strategy, and quality are hygiene factors, the entry ticket. The differentiation between firms along those dimensions, is becoming narrower.

Given such conditions, it is the 'soft' factors such as corporate values, vision, leadership, a corporate conscience, corporate governance - around which firms can differentiate themselves. In fact, differentiation built around these so-called 'soft' dimensions will become more powerful and enduring, because they would be so difficult to imitate.

Finally, although corporate governance is often thought about as a 'soft' issue, that, in no way, undermines its importance. 'Soft' it may be, but hard-headed investors increasingly place their money on these so-called soft issues.