Good corporate governance

It is time that publicly held companies in India are managed by professionals and not by their promoters and family members. Unfortunately, entrepreneurs and takeover tycoons often think that they are also god-gifted managers. They refuse to recognise that vision and leadership define success, not ownership. While entrepreneurs are most welcome to run their private firms, they should resist the temptation of running listed public companies as their family concerns. Today, over 60 public companies, mostly under family management, are facing insolvency proceedings. Family management of listed concerns has become a major concern of ordinary as well as institutional shareholders and creditors.

The mismanagement of Ranbaxy, once the country's biggest pharmaceutical company, by some three successive generations of the late Bhai Mohan Singh family, the corporate war between Singh brothers — Malvinder and Shivinder, the father and son fight at family managed billion-dollar textile empire Raymonds, the collapse of Pramod Mittal-managed Ispat group, and the grieving creditors and ordinary shareholders of the grounded Anil Ambani-managed Reliance Telecommunications (R-Com) are among many examples where public company promoters and their family management have done little good to the market image of such enterprises.

Last year, Ranbaxy promoters Malvinder Singh and Shivinder Singh lost an appeal filed before a Singapore court in the Daiichi Sankyo arbitration case where they had argued against a $500-million arbitration award without success. Japanese pharmaceutical major Daiichi Sankyo was cheated by Ranbaxy on its hidden business liabilities before its sale. Now, the two quarrelling brothers are facing probes and various criminal charges in India as well, the latest being Religare Finvest, a Religare subsidiary. A criminal complaint was recently lodged with the Delhi police against Singh brothers, Malvinder and Shivinder. They were accused of cheating, fraud, and misappropriation of funds to the tune of Rs 740 crore. Also, Fortis wrote to SEBI to get them arrested to recover Rs.472 crore.

The situation, surrounding the issue of corporate governance, has come to such a pass that the Securities and Exchange Board of India (SEBI) has lately turned against the practice of allowing family members, close relatives or related parties of the chairman of a listed firm from becoming managing director, and vice versa. Most of the family-promoted public companies have merged the posts of chairman and managing director in favour of the family promoter. Notably, the Uday Kotak committee has recommended that the two functions should be split.

SEBI too thinks that holding the two posts by members of the same family will defeat the purpose of good governance as it would lead to an overlapping of the board and management and conflict of interest. SEBI's new listing norms stipulate that the chairman of a company will not be executive director or related to the managing director or chief executive officer (CEO) as defined in the Companies Act. SEBI has asked the country's top 500 listed firms in terms of market capitalisation to comply with the new provisions by April 1, this year.

According to reports, Bajaj Auto, Godrej Industries, Apollo Enterprises, Adani Enterprises, Jaiprakash Associates, and Jindal Stainless are among the marquee firms that may need to change their existing management and boardroom structures as both the positions in these companies are held by members of the same family. Obviously, SEBI is against the concentration of powers in a public company with the promoter and his family. Incidentally, the Uday Kotak committee is of the view that the issue of separation of the roles of chairperson and CEO or MD is not a recent phenomenon. It is a growing concern in corporate governance worldwide, the committee points out.

Quite understandably, family managed public companies are upset. Industry bodies such as FICCI and CII have opposed the SEBI move. They submitted their concern before the SEBI chairman in December saying the norm could be onerous and would not guarantee effective board leadership. "Industry feels that the separation of the offices of chairman and MD may not be conducive to efficiency in decision making. Companies should be permitted to select the structure and leadership that best fits their business needs," said Dilip Chenoy, FICCI secretary-general, in a letter to the SEBI chief. Both FICCI and CII think that the decision should be left to shareholders. CII said the board of a company was best-placed to determine whether the chairman and MD should be the same person. Nevertheless, the new rule can help achieve a better and more balanced governance structure by enabling more effective management supervision.

Interestingly, G. D. Birla, the doyen of Indian industry and a corporate visionary, and his sons had practiced the principle of corporate governance at a time when not even many family-promoted MNCs quite fully appreciated it. Listed Birla firms were all board-managed. The companies were run by professional managers. Members of the board, chaired by a Birla, were all non-executive directors. The chief executive was an invitee at board meetings. No Birla received a salary from his public company. He earned mainly from dividends. In a way, it had put the professional management under pressure to continuously improve the physical and financial performances of the company and plan for its future.

The corporate world has vastly changed in the last 50 years. The need for good corporate governance is highly appreciated in all modern markets and protected by state laws though they don't fully guarantee the adherence to the principle. The collapse of Lehman Brothers, the more recent $10-billion Deutsche Bank scandal and the arrest of Carlos Ghosn as the boss of Renault SA and Nissan Motor Co. raise the issue of fallibility of the modern corporate governance system. Yet, the good thing is that mischief-makers ultimately get exposed and tried under law. Logically, India, boasting a strong and independent judicial system, should embrace the global practice of corporate governance.

(The views expressed are strictly personal)