Analysis of Corporate Governance concept and practice with impact
on growth and protecting interests of multi stakeholders in India
ATHAR MUDASIR
Objective and perspective
Business policy
Governance refers to good behavior and is an essence of development in direction of human behavior. Governance is as old as civilization, the formal roots to literal word Governance originates from ‘gubernate’ which means to ‘steer or guide’. The evolution of literal word corporate governance in modern world assents by Sir Adrian Cadbury Committee, which caters term corporate governance in U.K and later Blue Ribbon committee report in USA. It defines Corporate Governance “as the system by which the companies are directed and controlled.
Corporate governance a buzz word in modern context of
trade and commerce to manage, direct and control the corporations in more
liable and efficient code of practices to achieve precise Governance with
better standards with accountability, transparency and integrity and according
to political economy of nation and securing public and investors interests. In
the modern dynamic and challenging age where corporation have enlarged to vast
extent and influence on trade of nation and world trade it has become very
important for nation to protect both civil and political aspects. Corporate governance has encompassed the
entire network of integration in the corporate sector and society as a whole.
It is all set of arrangements of laws, rules, regulations and voluntary
practice that caters companies to attract human resources and finance, perform
efficiently with proportionately caters long term objectives and value for
shareholders and other multi-stakeholder’s vested interests. The interpretation
and understanding about good corporate governance is constantly changing, the legislatures
and institutes are been significantly revised with adequate supplementation and
subsequently the principles of corporate governance and the recommendations of
their implementation following the trend of market. The Cadbury committee
report mainly dealt with aspects of financial transparency and related role of
directors and auditors, it significantly proves as prevailing trend in the
European economy as well as other economies of the world have subsequently
cater its importance and utility so numerous Amendments are been made in their
legislations taking into consideration the last European Commission
recommendations for the remuneration of directors of listed companies. The aim of the Recommendations is not only to
promote and improve corporate governance of the companies listed on the stock
exchange but strengthening financial and strategic objectives of a company in
more transparent and fair review and subsequently overall business ethics and
culture of corporate governance in the public and entrepreneurs environment.
“good corporate governance" with each passing day is becoming increasingly
more important and is no longer a novelty to us; today discusses are been
initiated the necessity and importance of good corporate governance as it has
proven to be emergency aid. "Comply
or explain" principle is still not a mandatory obligation to the company
to reshape their corporate governance according to the recommendations in
initial phase, but with continuous need of time and investor friendly it helps
to understand the specifics and importance’s of corporate governance practiced
used by each single company. Analyzing the previous “comply or explain”
statements, we can conclude that the companies are evaluating the efficiency of
code on corporate governance on each recommended principle and applicability to
the company business and environment. Companies instead of perceiving them as a
compelling demand are using the recommendations as best practice. These changes
in the recommendations are unlikely to be the final and last ones. Still, the
main goal and task will always remain unchanged – to create a uniform and
convenient system for enhancing corporate governance and for solution of any
discrepancies it assists as support medium to the company for management and
its concerned objectives. The efforts are to attain the company's strategic
goals in the most efficient manner and to increase the company’s value as much
as possible with significant adherence of growth in prospective economy.
This led the UK Government to recognize insufficiency of
existing legislation and role of self-regulation as a measure of controlling
scandals and financial collapses. Some of the corporate disasters took place
primarily due to insufficiency of implementable governance practices. To
prevent the recurrence of such business failures, the Cadbury Committee was set
up by the London Stock Exchange in May 1991 inter alia to help raise standards
of corporate governance. In its report and associated "Code of Best
Practices" (1992), it spelt out the methods of governance needed to
achieve a balance between the essential powers of the Board of Directors and
their proper accountability. Of the 19 recommendations, the most debatable
requirement was the one obliging the directors to report on the effectiveness
of a company's system of internal control. Subsequently constituted Paul Ruthman
Committee, to some extent, watered down the Cadbury committee’s proposal. It
restricted the reporting requirements to internal financial controls as against
the effectiveness of the company's system of internal control. After about 5
years Ron Hampel Committee on Corporate Governance was appointed to assess the
impact of Cadbury committee’s recommendations and to develop further guidance.
Greenbury Committee, which submitted its report in 1995, addressed the issues
pertaining to director's remuneration.
The cumulative effect of above efforts was the formulation of London
Stock Exchange's Combined Code appended to the listing rules of the Exchange
and its compliance being made mandatory by all listed companies. Listing Rules
of the Exchange require a listed company to include in the annual report a
disclosure statement that should be in two parts. In the first part the Company
has to add a report as to how it applies the principles in the Combined Code
while in the second part of the statement the Company has either to confirm
that it complies with the Code provisions or alternatively add an explanation
where it does not. Macro review of corporate governance also includes country
specific research and evaluation of corporate governance framework across national
borders, which eventually led to the collapse of Andersen. These developments
triggered another phase of reforms in the area of corporate governance,
accounting practices and disclosures - this time more comprehensive than ever
before. In July 2002, less than a year from the date when Enron filed for
bankruptcy, the Sarbanes-Oxley Act popularly called SOX was enacted. The Act
made fundamental changes in virtually every aspect of corporate governance in
general and auditor independence, conflict of interests, corporate
responsibility, enhanced financial disclosures and severe penalties for willful
default by managers and auditors, in particular.
Ever since the concept of corporate entity was
recognized, corporate governance in various manifestations has been in
existence. The Foreign Corrupt Practices Act, 1977 (USA) made specific
provisions regarding establishment, maintenance and review of systems of
internal control. In 1979, US Securities Exchange Commission prescribed
mandatory reporting on internal financial controls. Due to high profile
failures in the US, the Tread way Commission constituted in 1985 highlighted
the need of putting in place a proper control environment, desirability of
constituting independent boards and its committees and objective internal audit
function. As a consequence, the Committee of Sponsoring Organizations was
formed which prescribed a control framework in 1992. After the Enron debacle of
2001, came other scandals involving large US Companies such as WorldCom, Owest,
Global Crossing and the auditing lacunae that eventually led to the collapse of
Andersen. These developments triggered another phase of reforms in the area of
corporate governance, accounting practices and disclosures - this time more
comprehensive than ever before. A spate of scandals and financial collapses in
the UK in the late 1980s and early 1990s made the shareholders and banks worry
about their investments.
In the capitalist system the trade and commerce is
directly conducted and influenced by individual trader and companies having
there substantial objectives with liberal rules, thus it’s the nations own
interest to fulfill adequate and reliable trade network on which its economy
stands therefore a best code of practices which includes various and numerous
institutional integration of regulation bodies and concerned authorities to
promote trade and prohibit any undue transactions against national interests so
a multi and diversified web of all related parties must be synchronized in such
a manner as adequate and prompt for better and growth of economy. So it’s best
to govern the corporations indirectly so that they could fulfill the aim and
targets of nation for which they have been liberalized proportionately, privatized
market and other participants. Corporate governance is beneficial to all stake
holders of economy and works at grass-root level in economy and influences at
macro level by integrated solutions and proper adherence of code and practices.
Corporate
Governance defined by Noble laureate Milton Friedman as “the conduct of
business in accordance with shareholders desires, which generally is to make as
much money as possible, while conforming to the basic rules of the society
embodied in law and local customs’’. Therefore corporate or corporation is
derived from Latin word ’’corpus’’ which means a ‘’body’’. And governance means
‘’steer’’. Thus when combining both terms it refers Corporate Governance as a
set of systems procedures, policies, practices, standards to ensure a
considerable degree of relationship with various stakeholders for a
transparency and accountability. Therefore the administrating process and
system places for satisfying stakeholders expectations.
The basic
objective of corporate governance is to enhance and maximize shareholder value
and protect the interest of other stake holders”. According to World Bank,
Corporate Governance is Blend of law, regulation and appropriate voluntary
private sector practices, Which enables
the corporation to attract financial and human capital to perform efficiently, Prepare itself by generating long term economic
value for its shareholders and While respecting the interests of stakeholders
and society as a whole.
In India the concept of good governance finds its assent
in ancient history dating back to third
century B.C. where Chanakya prime minister of King Ashoka (Parliputra)
elaborated fourfold duties of a king viz. Raksha, Vriddhi, Palana and
Yogakshema. Substituting the king of the
State with the Company CEO or Board of Directors the principles of Corporate
Governance refers to protecting shareholders wealth (Raksha), enhancing the
wealth by proper utilization of assets (Vriddhi), maintenance of wealth through
profitable ventures (Palana) and above all safeguarding the interests of the
shareholders (Yogakshema or safeguard). Corporate Governance was not in agenda
of Indian Companies until early 1990s and no one would find much reference to
this subject in book of law till then.
In India, weakness in the system such as undesirable stock market
practices, boards of directors without adequate fiduciary responsibilities,
poor disclosure practices, lack of transparency and chronic capitalism were all
crying for reforms and improved governance. The fiscal crisis of 1991 and
resulting need to approach the IMF induced the Government to adopt reformative
actions for economic stabilization through liberalization. The momentum
gathered albeit slowly once the economy was pushed open and the liberalization
process got initiated in early 1990s. As
a part of liberalization process, in 1999 the Government amended the Companies
Act, 1956. Further amendments have followed subsequently in the year 2000, 2002
and 2003. A variety of measures have been adopted including the strengthening
of certain shareholder rights (e.g. postal balloting on key issues), the
empowering of SEBI (e.g. to prosecute the defaulting companies, increased
sanctions for directors who do not fulfill their responsibilities, limits on
the number of directorships, changes in reporting and the requirement that a
‘small shareholders nominee’ be appointed on the Board of companies with a paid
up capital of Rs. 5 crore or more)
In India corporate governance has been spotted and
essence towards better perspective; The Kumar Mangalam Birla Committee
constituted by SEBI has observed that "Strong corporate governance is
indispensable to resilient and vibrant capital markets and is an important
instrument of investor protection. It is the life blood that fills the veins of
transparent corporate disclosure and high quality accounting practices. It is
the muscle that moves a viable and accessible financial reporting structure”.
It signifies fundamental objectives of corporate governance in the enhancement
of long term shareholders value while protecting at same time interests of
other stakeholders and subsequently SEBI directed stock exchanges in February
2000 to include clause 47 on corporate governance in their listing agreements.
Under clause 47 of listing agreement of SEBI provide its
object and directed companies having a paid up share capital of Rs. 3 crore and
above, are required to comply with provisions relating to;
·
Composition of the board of directors, board
meetings and code of conduct
·
Audit committee
·
Subsidiary companies
·
Related party transaction
·
Accounting standards
·
Risk management procedures
·
Use of proceeds from public issue
·
Remuneration of directors
·
Management, decision and analysis report
·
Share holders/ investors grievance committee for
redressal of complaints
·
CEO/CFO certification of specified matters
·
Compliance report on corporate governance
inclusive annual report and quarterly compliance to stock exchange
·
Certification regarding compliance and
conditions as stipulated in clause 47 to annexed with directors report
N.R. Narayana Murthy Committee on Corporate Governance
constituted by SEBI has observed "Corporate Governance is the acceptance
by management, of the inalienable rights of shareholders as the true owners of
the corporation and of their own role as trustees on behalf of the shareholders.
It is about commitment to values, about ethical business conduct and about
making a distinction between personal and corporate funds in the management of
a company."
The companies(amendment) act, 2000 was primerly devoted
to corporate governance. Its important provisions related to
·
Protection of small depositors
·
Voting through postal ballots
·
Audit committee to be constituted to oversee
financial reporting process and disclosure of financial information
·
Secretarial compliance certification in
prescribed form and filling to ROC and copy attested to annual reports of the
board, in case company not required to appoint whole time company secretary
·
Director’s responsibility statement
·
Small shareholder’s director
·
The Institute of Company Secretaries of India has also
defined the term Corporate Governance as under: "Corporate Governance is
the application of best management practices, compliance or law in true letter
and spirit and adherence to ethical standards for effective management and
distribution of wealth and discharge of social responsibility for sustainable
development of all stakeholders."
Another comprehensive definition given in the report on
corporate governance that was accepted for implementation by the Singapore
Government is that the term refers to the “process and structure by which the
business and affairs of the company are directed and managed in order to
enhance long term shareholder value through enhancing corporate performance and
accountability, whilst taking into account the interests of other
stakeholders”.
Thus in order to get a fair review on the subject we may
summarize the Corporate Governance in a narrow but with broad definition. In the narrow sense, corporate governance
involves a set of relationship amongst the company’s management, its board of
directors, its shareholders, its auditors and other stakeholders. These
relationships, which involve various rules and incentives, provide the
structure through which the objectives of the company are set, and the means of
attaining these objectives as well as monitoring performance are determined.
Thus, the key aspects of good corporate governance include transparency of
corporate structures and operations; the accountability of managers and the
boards to shareholders; and corporate responsibility towards stakeholders.
While corporate governance essentially lays down the framework for creating
long-term trust between companies and the external providers of capital, it
would be wrong to think that the importance of corporate governance lies solely
in better access of finance. Companies
around the world are realizing that better corporate governance adds
considerable value to their operational performance in the following ways: It
improves strategic thinking at the top by inducting independent directors who
bring a wealth of experience, and a host of new ideas, It rationalizes the
management and monitoring of risk that a firm faces globally, It limits the
liability of top management and directors, by carefully articulating the
decision making process, It assures the integrity of financial reports. It has
long term reputational effects among key stakeholders, both internally and
externally and In a broader sense, however, good corporate governance- the
extent to which companies are run in an open and honest manner- is important
for overall market confidence, the efficiency of capital allocation, the growth
and development of countries’ industrial bases, and ultimately the nations’
overall wealth and welfare. It is important to note that in both the narrow as
well as in the broad definitions, the concepts of disclosure and transparency
occupy center-stage. In the first instance, they create trust at the firm level
among the suppliers of finance. In the second instance, they create overall
confidence at the aggregate economy level. In both cases, they result in
efficient allocation of capital. Having committed to the above definitions, it
is important to note that ever since the first writings on the subject appeared
in the academic domain, there have been many debates on the true scope and
nature of corporate governance mechanisms around the world. More specifically on the question ‘Who should
corporate governance really represent?’ This issue of whether a company should
be run solely in the interest of the shareholders or whether it should take
account the interest of all constituents has been widely discussed and debated
for a long time now. Two definitions of Corporate Governance highlight the
variation in the points of view:
‘Corporate governance is concerned with ways of bringing
the interests of investors and manager into line and ensuring that firms are
run for the benefit of investors’. Corporate governance includes ‘the
structures, processes, cultures and systems that engender the successful
operation of organizations’
Comprehend standards for corporate governance which took
roots there and stretched to the other countries. The members of Organization
for Economic co-operation and Development (OECD) took early initiatives to deal
with governance issues. Equity markets in these countries were not especially
strong but the investment in equities was on the ascendance. Subsequent to 1990
the changeover from central planning to market forced economies, predominantly
the privatization of public sector companies, and the need to make available
governance principles for the promising private sector, brought the subject of
corporate governance to the center stage. Due to outcome of 1997 economic and
financial setback, Asian countries too became intensely involved in the subject
of corporate governance. It was understood that despite the fact that corporate
management is vital when it comes to investment, somewhat more important is
superior corporate governance. This has become all the more significant because
globalization means, in economic expressions, that four pillars of the economy
i.e. physical capital in terms of plant and machinery, financial capital in
terms of foreign direct investment or investment in emerging capital markets,
technology and labor move across national borders freely. The age-old wisdom of vasudevkutambham has
become relevant again and the world has turned into truly borderless and a
global village. This forced to put into practice internationally acknowledged
norms of corporate governance standards initiate atmosphere in private sector,
public sector. The focal point of official efforts brought out the OECD
'principles of Corporate Governance, endorsed by OECD ministers in May 1999 and
subsequently revised in 2004. The doctrine is based, for all intents and
purposes, on the accessible legal and regulatory preparations as well as the
best prevailing practices followed by market players in the OECD countries.
Support for this OECD principles has been reaffirmed on several occasions by
diverse inter-Governmental groups and by· international organizations as part
of efforts to construct a sound architecture of corporate governance after the
1997 crisis. The OECD revised its set of
guidelines of Corporate Governance in the year 2004 pursuant to corporate
governance developments including corporate scandals that further focused the
minds of Governments on improving corporate governance practices. The new OECD
principles agreed by OECD countries in April 2004 reflects a global harmony
vis-à-vis the critical importance of good corporate governance in contributing
to economic feasibility and strength. For text of OECD Principles of Corporate
Governance 2004, in this context we can benchmark India’s corporate laws,
primarily the Companies Act 1956, and the Clause 49 of the listing agreement of
SEBI Act to these principles and highlight the fact that India Inc. conforms to
most OECD principles of corporate governance (2004) in terms of governance,
transparency and disclosures.
S/d
Athar Mudasir
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