• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Deepak Sanchety

The regulators are doing a good job in laying down the form of good corporate governance. At the same time, mere legislation may not suffice to tame rogue companies. For good corporate governance to take root, shareholders must know that their own activism and alertness is crucial.

AUTHORITY, it is said, cannot enforce morality. In the wake of the recent corporate turbulence, the question at the top of the mind of shareholders is whether good corporate governance is totally legally enforceable. Corporate accountability as companies raise capital from the public.

When a person invests money as share capital, he has the right to expect the company management to act as trustee and ensure the safety of the capital and a fair return.

The debate on corporate governance is not new. Shareholders needed to be assured that potential conflicts of interest do not impair objectivity in the decision making of the Boards.

In the US, the fall of Enron and WorldCom brought into the open the unholy nexus between rogue corporates, amenable auditors and the capital market and raised fresh concerns about corporate governance.

This led to the Sarbanes-Oxley Act that prescribes more stringent reporting standards for US auditors and corporate managements and provides for hefty penalties in case of defaults.

India has had its own share of corporate frauds. The vanishing non-banking finance companies, sinking mutual funds, teak plantation schemes and time-share holiday companies are just a few well-known examples.

On the lines of western models, India also commissioned committees to look into the issues of corporate governance. The Kumar Mangalam Birla committee set up by SEBI gave its report in 1999.

The Naresh Chandra Committee set up by DCA (2003) took it forward. Another committee on corporate governance was constituted by SEBI, under the chairmanship of Mr Narayana Murthy to suggest how best to further improve corporate government practices.

Defying the regulatory push: Detailed requirements have been laid down in these reports to ensure good corporate governance.

This includes requirements regarding composition of Board of Directors, minimum number of independent directors on the board, minimum number of meetings of the board in a year, setting up Audit Committee with majority of independent directors, powers of the audit committee etc.

It is also provided that there should be accountability, transparency and better disclosures relating to compensation to directors.

Internationally, the regulators are doing a good job in laying down the form of good corporate governance.

At the same time, it is also being more openly accepted that mere legislation with its brittleness and rigidity may not be sufficient to tame the rogue corporates.

The persistent occurrence of scandals in the capitalist structure bears testimony to the pervasiveness of human greed and human ingenuity in bypassing legal limitations.

This cannot be highlighted more than by the fact that different governance structures have been tried by different countries. Under the German system the Board is two-tiered. The Management Board is responsible for managing the company, whereas the Supervisory Board consists of non-management members including employee and shareholder representatives and appoints, supervises, and advises the members of the Management Board.

The UK, like India, prescribes one board. The US stipulates only non-executives on the board other than the CEO. But all these countries have had their own share of corporate frauds.

Aided by shareholder apathy: Unfortunately, most shareholders still think with feudal bent of mind and treats the management of a company is practically the owner.

Legally, the management of a company serves the shareholders who are the actual owners of the company.

It is common experience across the board that Indian shareholders do not take interest in AGMs.

Though the Company's Act allows postal ballot facility, shareholders have not been seen to be using this privilege.

Most of the AGM's and EGM's are convened and conducted simply to comply with the form of legal requirements.

The interested parties, mostly close to the management, collect proxy ballots from large investors and use them for ratifying decisions taken by the board.

Shareholders are seldom aware or informed enough to form considered opinions about the decisions to be ratified.

Needed more disclosures: To enable the investors to take informed decisions, it is essential that all the relevant information is made available to the shareholders.

In developed countries like US, all the information that companies are required to share with share holders/ investors is available at the click of a mouse button. The US EDGAR (Electronic Data Gathering and Retrieval) System allows the issuer companies to file all the relevant information in a secure manner electronically.

It is mandatory for US companies to file information electronically through EDGAR. The investors /shareholders can retrieve the information simply by accessing the system on Internet.

A commendable attempt was made to offer similar facility to Indian investors through the EDIFAR (Electronic Data Information Filing And Retrieval) system.

A wide range of information filed by companies with exchanges is still not available on EDIFAR in a structured user-friendly manner. Suggestions on improvement of EDIFAR have been invited on SEBI Web Site. Hopefully, a top-notch system for information filing and retrieval will soon be available.

Corporate governance is an extremely subjective issue and to try to quantify it in terms of rating (as was proposed) would be akin to attempting ratings for initial public offerings, offers for sale, open offers in takeovers and even of the quality of individual stocks.

India has moved away from merit-based regulation of securities markets to disclosure-based regime. The fundamental principle in disclosure-based regulation is to allow the investors/shareholders to make their own informed decisions.

For this purpose, it is to be ensured that all the relevant facts, figures and information are made available to the investor/shareholder.

Genuinely independent directors: The debate on corporate governance is now getting more focused on the role of independent directors.

Who is an independent director? The Indian definition of independent directors as given in the recently amended clause 49 of listing agreement is an inclusive definition, which says who all could be independent directors.

The British definition, interestingly, as given in the Higgs report is an exclusive definition which provides for who cannot be an independent director.

The latter appears to be more appropriate as it provides who is not acceptable as independent director. An inclusive definition for independent directors is too restrictive. It is only human that the management of company would choose an "acquiescent independent" on board. The really independent may never be taken on board the board.

It is also a matter of open debate as to what would happen to the decisions taken by the board, if subsequently it is found that an independent director is not actually independent.

Beyond listing agreement: The corporate governance code is supposed to be enforced through the listing agreement with exchanges.

The enforceability of the code is subject to enforceability of the listing agreement. Of the about 6,000 listed companies in India, only about 30 per cent comply with its provisions in an acceptable and meaningful manner.

The top 200 or so companies are subject to fairly intense scrutiny by media and investors as far as compliance levels are concerned. A default gets comparatively quickly noticed.

Corporate governance practices are often questioned even in such better-known companies. What happens in the rest of the listed companies can only be conjectured.

Companies rated high on corporate governance are few in number. While the regulators have done their fair bit in laying down the form for good corporate governance, the push for enforcement will need to come from the shareholders.

In a democracy, the citizens get the leadership they elect. In corporate democracy, it is up to the shareholders to play their role and get the governance they want. The wise have said, eternal vigilance is the price for peace.

The author is Additional Commissioner - Income Tax. His e-mail address is deepaksanchety@yahoo.com

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Value inflow sans cash outflow

Copyright © 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line