Millennium Post

Focus on Corporate Governance

Their complexity lies in ethical dimensions where transparency and mutual trust are reinforcing pillars.

Focus on Corporate Governance
The Infosys imbroglio and tussle between key stakeholders and management has brought to the fore many differences in interpreting corporate decisions. The recent spurt in controversies on Corporate Governance (CG) in prominent entities has highlighted the need to resurrect the umbilical relationship between management and boards of companies. It is in the larger interest of shareholder community to maintain harmony between board and management to improve the value creation. The board of companies is responsible to the shareholders and therefore need to make management of companies do what is best for sustainable growth. Added to these arguments and counter-arguments of eminent experts of CG, the submission of the Uday Kotak Committee report on strengthening CG has further intensified intellectual debate on measures to improve the governance in corporate entities.

CG policies of entities are under constant public/investor scrutiny in a bid to bring better sustainability of stakeholder value and going by the simple objective of CG, it is meant to enhance the same. The complexity of CG lies in its ethical dimensions where transparency and mutual trust act as reinforcing pillars. Making management of the companies accountable to widely disbursed shareholder community is indeed a challenge. It is undertaken by the board by structured policy framework, discussions, and debates on major decision points and arriving at near consensus on issues in the best and larger sustainable interest of the organisations.
Committees on CG
Several expert committees have worked from time to time to bring about improvement in CG in India beginning with Kumar Mangalam Birla committee in 1999, Naresh Chandra Committee in 2001, NR Narayanmurthy committee – 2003, JJ Irani committee for comprehensive revision of the Companies Act 1956, Dr. P. J. Nayak Committee to review governance in banks -2014. Many more stalwarts have worked to shape CG to ensure that companies run on best practices and keep long-term interest of the shareholders. Management associated with the operational aspects of running the companies have to keep the sanctity of CG intact.
Better legal credence of CG practice comes from the introduction of Clause 49 of the listing agreement incorporated as mandatory for all listed companies by Securities and Exchange Board of India (SEBI) in 2000. The disclosure standards and transparency insisted in it keep companies always vigilant. Submission of Business Responsibility Report (BPR) has also been made mandatory along with the annual reports of listed companies from 2012 to ensure that they undertake socially responsible business going even beyond the shareholder interest. Ministry of Corporate Affairs (MCA) has charted a voluntary code of conduct on CG which the companies should incorporate in their working so as to do good to shareholders. The newly enacted Companies Act 2013 provides mandatory design of structure of a board of company and its composition. Besides these regulations, the Consumer Protection Act 2010 also provides opportunity to shareholders to hold the company executives accountable for performance where they invested their funds.
Global practices in CG
The wave of financial crises of 1998 in Russia, Asia, and Brazil, affected their entire economies and deficiencies in CG endangered the stability of the global financial system. CG failures in United States and Europe caused some of the largest insolvencies in history. In the aftermath of these events, economists, the corporate sector and the policy makers worldwide recognised the potential long term consequences of weak CG systems. Therefore, every such corporate debacle brought improved versions of CG from where the committees may draw a cue. The fall of Enron, the dotcom burst, collapse of Barings Bank, fall of Lehman Brothers are only few to refer. The major cue to improve CG comes from Sarbanes Oxley Act 2002, Dodd-Frank Act for Wall Street reforms, and Committee of the Sponsoring Organizations of the Treadway Commission (COSO Framework), Organization for Economic Cooperation and Development (OECD) principles of CG enacted in 1999 and revised in 2004. These are only some references but the essence of the global developments points towards the need to sustain ethical standards of the organisations.
Uday Kotak Committee
Structure of the board is the foundation of CG. Among many suggestions for improvement of CG, the particular focus has been on the composition, qualifications, independence, diversity, skill sets and compensation of its board members. They are considered important reinforcements inducted through the structure of board. Direction of Board in dissemination of leadership to the company management is the crux in the realm of CG. While reinforcing the significance of toning up governance system akin to emerging best global practices, the committee laid more specific emphasis on (i) Increasing the number of Independent Directors (IDs) from three to six to induct more expertise and bring in outside professional view point. (ii) Widening gender diversity to bring in a minimum of one women director on the board. It also laid down the significance of qualification and appointment and performance review of IDs that should vest with the board. It specifically rests its main plank on the role of IDs in protecting investor interest. Like many committees, it also envisages separation of the position of Managing Director and Chairman of the company, so that there is no conflict of interest in functioning of day to day operations and in the articulation of vision, strategy building for the company. The value addition of the committee lies in its reinforcing stress on increasing role of IDs and using their expertise to create better entities.
Future of CG in India
A holistic view emanating from various committees in India and abroad, CG forums that are coming up to strengthen its implementation in companies, points of controversies seen in the corporate space, and legal provisions taking shape, all of this means that the future of CG will be under more scrutiny of stakeholders. The transparency and disclosure standards will make public the affairs of the company and intervention will be hastened and issues may not wait for the Annual General meetings. The increased sensitisation of shareholders and global and domestic investors can ring-fence the companies against any divergence from its set vision and growth path. It is only the inclusive watch of stakeholders that can bring best value.
However, independence of IDs, diversity of board, risk management strategies, application of technology and use of artificial intelligence can create the differentiation in the performance of corporate sector. In the light of the recent up-gradation in the global ranking in 'Ease of doing business' by considerable 30 notches to reach a mark of 100, strengthening CG in listed commercial entities will accelerate further uptick. Even non-corporates can take cue from these developments in CG principles and improve their internal governance on a structured basis to help create better economic value to their stakeholders. A sense of better accountability towards stakeholders will be the hallmark to improve CG. Therefore, the yeoman contribution of the committee can be effective only when corporate entities revamp CG strategies in line with the committee both in letter and spirit to harness its synergy. The enhanced role of regulators, associations and voluntary forums in guiding commercial entities towards best CG practices will have equally critical role in bringing corporate excellence.
(The author is Director, National Institute of Banking Studies and Corporate Management – NIBSCOM. The views expressed are strictly personal.)

K Srinivasa Rao

K Srinivasa Rao

Our contributor helps bringing the latest updates to you

Share it