Recent Developments in Corporate Governance

The Department of Company Affairs, in May 2000, invited a group of leading industrialists, professionals and academics to study and recommend measures to enhance corporate excellence in India. The Study Group in turn set up a Task Force, which examined the subject of Corporate Excellence through sound corporate governance and submitted its report in Nov. 2000. The task force in its recommendations identified two classifications namely essential and desirable with the former to be introduced immediately by legislation and the latter to be left to the discretion of companies and their shareholders. Some of the recommendations of the task force include:

  • Greater role and influence for nonexecutive independent directors
  • Stringent punishment for executive directors for failing to comply with listing and other requirements
  • Limitation on the nature and number of directorship of managing and whole-time directors
  • Proper disclosure to the shareholders and investing community
  • Interested shareholders to abstain from voting on specified matters
  • More meaningful and transparent accounting and reporting
  • Tougher listing and compliance regimen through a centralized national listing authority
  • Highest and toughest standards of Corporate Governance for listed companies
  • A code of public behaviour for public sector units
  • Setting up of a centre for Corporate Excellence

Recently, the Government has announced the proposal for setting up the Centre for Corporate Excellence under the aegis of the Department of Company Affairs as an independent and autonomous body as recommended by the study group. The centre would undertake research on Corporate Governance; provide a scheme by which companies could rate themselves in terms of their corporate governance performance; promote corporate governance through certifying companies who practice acceptable standards of corporate governance and by instituting annual award for outstanding performance in this area. Government’s initiative in promoting corporate excellence in the country by setting up such a center is indeed a very important step in the right direction. It is likely to spread greater awareness among the corporate sector regarding matters relating to good corporate governance motivating them to seek accreditation from this body. Cumulative effect of the companies achieving levels of corporate excellence would undoubtedly be visible in the form of much enhanced competitive strength of our country in the global market for goods and services.

A large number of public sector companies both in the banking industry and financial sector have on their Boards representative of the Government / Reserve Bank of India. It is for debate whether functionaries of the Government should sit on their boards. While there is no easy or straightforward answer to this question, at some distant future it is hoped, all the Directors would be truly independent. The subject is no doubt complex and can be looked upon from various angles. Frauds in the banking system are also increasing but computer Management Information Systems should be able to detect them early and the Board must have the will to deal with such mischief makers in an exemplary manner. Zero tolerance should be the goal for frauds in the banking system. It is the leader at the helm of affairs who makes a difference. A close coordination exists through High Level Co-ordination Committee (HLCC) between RBI, SEBI, IRDA and the Secretary Finance, Government of India who has a formal structure for reviewing the affairs which impact the whole financial system. Although the US and UK models are different, this model has served us well and we seem to be comfortable to continue with the same for some more time to come.

There is an entire subject called “whistle blowing” and there is enormous literature on this subject — when to blow the whistle, who should blow the whistle and where the whistle should be heard. These are the questions for which one needs to find the answers between spate of anonymous letters to which any one working in public sector is used to and honest officials are harassed sometimes on one side and the damaging investigative audit reports and doctored balance sheets on the other side. Somewhere in between lies the governance and ethics; and standards expected to be set up by the virtuous men appointed for heading these institutions. In such organizations the shareholders and the other stakeholders derive full value. It is myopic, bordering on foolishness, to look for astronomical return by the shareholders, who would allow the boards to indulge in unethical practices like market rigging, insider trading, speculation and host of other irregular practices for the sole purpose of making huge profits. One cannot argue that the shareholder’s value is enhanced by higher profits and dividends are distributed by the board acting merely as an agent of the shareholder who becomes the principal. Here lies the test of governance of the board of directors walking the well defined, honest and straight path in conducting the affairs in the required atmosphere of transparency seen and perceived by all the stakeholders, the markets and the regulators. Then only one can confidently state that corporate governance has taken firm roots in this country.

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