As Mr.Myburgh rightly says that Corporate Governance (CG here after) is not just of matter of right and wrong, rather it has much broader and different implications. Let us first define CG in terms of literature, it says:
Definition: CG is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. CG also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.
From the above definition we can easily say that CG is a multi-faceted subject. One of the important tasks of CG is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.
As we are studying the scenario of CG in Indian context let us consider the definition of CG given by Securities and Exchange Board of India (SEBI). According to them CG 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.
This definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution where CG is viewed as business ethics and a moral duty.
From the diagram shown below we can understand that CG needs a proper framework of following items for its proper implementation and safe guarding the interest of all associated parties:
Board of Directors.
Business Practices and Ethics.
Legal and Regulatory policies.
Disclosure and Transparency.
Proper Communication.
Existence of CG in India: In India CG is used in Governance with reference to all kind of organizational structures like:
NGO- not for profit organizations.
Municipal corporation/Gram Panchayats.
Central/ State Government.
Partnership firm/Large Corporations.
To ensure proper governance various steps have been taken by the government such as:
Year
Name of Committee/Body
Areas/Aspects Covered
1998
Confederation of Indian Industry (CII)
Desirable Corporate Governance - A Code
1999
Kumar Mangalam Birla Committee
Corporate Governance
2002
Naresh Chandra Committee
Corporate Audit and Governance
2003
N. R. Narayana Murthy Committee
Corporate Governance
2005
JJ Irani Committee Report
Suggestions for improvement in CG.
Main objectives of above committees are:
Strengthen the management oversight functions and accountability.
Balance skills, experience and independence on the board appropriate to the nature and extent of company operations.
Establish a code to ensure integrity.
Safeguard the integrity of company reporting.
Risk management and internal control.
Disclosure of all relevant and material matters.
Recognition and preservation of needs of shareholders.
Current Scenario in India: As we have seen that the government has taken ample steps to ensure proper CG, but when we take India's situation globally the picture becomes hazy.
India has shown most improvement in the last five years in terms of ease of doing business among South Asian countries, but still ranks very lowly 134th in sharp contrast to its stature as a rising economic power and the second fastest major growing economy in the world.
The World Bank and the International Finance Corporation's annual 'Doing Business' report for 2011 noted the progress India had made in making business easier, but that was not enough relative to others. India only moved a rank up from last year, as it implemented 18 business regulation reforms in seven areas.
Even among the nine South Asian countries that appear in the report, India again ranks low at the 7th position, above Bhutan and Afghanistan. Singapore ranks on the top in the world in terms of ease of doing business.
This ranking was based on nine parameters:
Starting a business.
Dealing with construction permits.
Registering property.
Getting credit.
Protecting investors.
Paying taxes.
Trading across borders.
Enforcing contracts.
Closing a business.
As per a report, India is one of the most difficult places to start a business, as it has the most procedures and the maximum cost to set up a business.
The maximum number of procedures is required in India in order to get construction permits. In addition, the cost to deal with these permits is also the second highest, the largest being that in war torn Afghanistan.
However, India has lesser procedures and takes lesser time to register property, the same report shows. It is more difficult than other South Asian countries to enforce contracts in India. "Where contract enforcement is efficient, firms have greater access to credit and are more likely to engage with new borrowers or customers," says the report highlighting its impact.
Other negative points that makes business environment difficult in India are the hurdles that exist in the country for closing a business. It takes 7 years for a company to go through insolvency in the country and yields the third least recovery rate after an insolvency process. The cost of insolvency is also the highest, way above the regional average.
India requires start-up businesses to pay 56 taxes a year, the second largest in the South Asian region, but it takes less time to do so, which saves costs for companies.
Although, South Asia is the most difficult region in the world to get credit for business and provides least credit information, India fares well in this crucial segment. The report notes that the country has good collateral and bankruptcy laws, which facilitate lending by protecting the rights of borrowers and lenders.
"Stronger investor protections matter for the ability of companies to raise the capital needed to grow, innovate, diversify and compete," it says taking note of India's good record.
Reasons for emergence of CG in India: There are various reasons for the emergence of CG, to name a few:
Corporate Scandals
The stock market scandal (Harshad Mehta) in 1992.
Ketan Parekh scandal in 2001
Tata Finance scandal (Serious financial irregularities).
Vanishing companies scam.
Satyam Scam.
3G Scam.
Radia's recent political lobbying scam.
Citi Banks Rs. 400 Cr fraud.
In order for the Indian capital market and Indian companies to compete in the global market, India needs a set of good corporate governance doctrines.
Trends of Corporate frauds in India:
Corporate Fraud in India is rising. Corporate fraud, particularly involving financial statements, is on the rise in India and internal controls are failing to prevent such abuses. Forty-five percent of the 1,000 respondents from leading Indian businesses declared that fraud had increased within their organization.
Corporate fraud has become an increasingly topical issue in India since leading outsourcer Satyam Computer stunned the nation's financial world in 2009 with the admission that its profits had been overstated for years. Satyam founder and former B. Ramalinga Raju declared he had inflated profits and jacked up the company's balance sheet by more than one billion dollars in what was India's biggest accounting fraud.
Weak internal control systems, eroding ethical values and a reluctance on the part of the line managers to take decisive action against the perpetrators are cited as the most vital underlying reasons for frauds being on the rise.
Outsourcing, increase in the use of third parties and technology have combined to open up new avenues of frauds like e-crime and intellectual property theft.
Corporate fraud thrives on higher attrition: Nearly one in every 13 corporate houses in India had suffered losses between Rs 40 lakh and Rs 4 crore due to corporate frauds while nearly half had faced such frauds in the last three years. About one in two corporates believe that at present corporate fraud is much more prevalent in India than three years ago.
New technologies, new inventions and expansions into new markets have opened the door to various forms of fraud, while the threat has increased mainly because of high attrition. These were some of the major findings of a report on fraud perception among top corporates around the globe by Economist Intelligence Unit (EIU) for Kroll Inc.
Interestingly in Asia, the increased threat doesn't lead to higher levels of counter measures, but it's just the opposite. While in India one out of two survey respondents said they did not employ any counter measures for probable frauds, in China nearly two out of three respondents didn't deploy any fraud mitigation measures.
A large number of corporates feel that high staff turnover is one of the main reasons for their increased exposure to fraud. In India, several recent cases of fraud have been detected in BPO firms, known for their high attrition rates.
Anne Tiedemann, regional MD, Greater China and Southeast Asia, Kroll Inc said as IT frauds, including data theft, become more advanced, corporates need to increase "compliance, put in place systems for (IT) health checks and look for early warning sings", to avoid being hit by frauds and thus lose money.
On the sectorial front, the survey pointed out that financial services, healthcare, pharmaceuticals and biotechnology and natural resources sectors lost the most due to frauds of varied kinds.
Regulators for CG:
Indian Companies Act, 1956
SEBI Act, 1992
Stock Exchanges-Listing Agreement
ICAI Act, 1949 (Institute Of Chartered Accountants Of India)
ICSI (The Institute Of Company Secretaries Of India)
ICWAI (The Institute Of Cost and Works Accountants Of India)
Awards for fair CG: Some companies which got awards are listed below:
ITC Ltd and Abhishek Industries Ltd. received the Institute of Company Secretaries of India National Award for Excellence in Corporate Governance 2006.
ITC Ltd has won the `Golden Peacock Award for Excellence in Corporate Governance 2005', instituted by the Institute of Directors, New Delhi, in association with the London-based World Council for Corporate Governance and Centre for Corporate Governance.
THE Coimbatore-based Precot Mills Ltd, in association with the Tamilnadu Centre of ABK-AOTS Dosokai, Japan, has for the first time instituted an award for textile units excelling in management practices.
But ICSI has consistently refused to rank companies for corporate governance. Its award process judges but does not rate companies for their governance performance. Industry bodies put off plans for rating and rewarding companies on corporate governance for now. There has to be a large number of companies effectively engaged in corporate governance before the best can be selected.
Trends: As we have seen that there have been a lot many changes in the regulations for CG, yet these scams keep coming particularly in India. To name a few loop holes in the systems are such as: The largest number of directorial positions occupied by a single individual is 15, with four such persons in the list of the firms surveyed. These are either chartered accountants or corporate lawyers.
Due to the distrust in Indian auditors, most of the multinational companies have insisted that the parent company's auditor should also audit the subsidiary companies in India, often at much higher costs
The board of directors of a company has become a tool that can be manipulated.
It is very complicated with around 9,000 listed companies in the country, and the amount of data provided is mind-boggling. To read the huge data and take a policy decision is difficult and time consuming
The culture of corporate governance has not really caught on in India except for a few companies. "For instance, Mr Anil Ambani raised the issue when he fell out with his brother, Mukesh. He accused his brother of several corporate governance failures. Subsequently, an arrangement was worked out between the brothers and the issues were pushed under the carpet. It is not an issue between the two of them alone, as several thousands of investors are involved,"
Most Indian companies were controlled by families and "it is difficult to persuade them to change their style of functioning and adopt corporate governance norms."
Another issue is the independence of the Institute of Chartered Accountants in disciplining its peers In India.
The Chartered Accountants Act, the Company Secretaries Act, and the Cost and Works Accountants Act provide the framework for taking disciplinary action against members. More often than not, disciplinary action is either not taken against auditors, or there is so much delay in bringing action against the auditors, that such action becomes irrelevant.
Sections 232 and 233 of the Indian Companies Act prescribe the penalties for any company's failure to comply with these provisions 128 and section 233 outlines penalties for auditor's non-compliance. Unfortunately, the penalties are so insignificant that they are unlikely to deter anyone from non-compliance.
Audit firms in India receive inadequate remuneration, thus explaining why audit firms engage in non-audit work.
An analysis of the board compositions of around 1,500 companies listed on the BSE shows that 58 individuals occupy over 10 directorship positions each in these firms, with several of them holding up to 15 directorial slots.
Holding non-independent director positions, but not involved in the day-to-day running of these companies.
Views of experts:
According to World Bank, Indian companies' disclosure of financial information is still poor while pressure from Indian investors to improve corporate transparency remains weak. With the exception of a handful of large businesses, most companies do not follow international best practice in disclosing information to investors, despite reforms to Indian corporate governance regulations. Aside from weak enforcement, the World Bank cites a lack of interest from investors as a major reason for the failure of these laws to improve disclosure according to a report from the World Bank.
What are the advantages of good CG:
Good corporate governance helps an organization achieve several objectives and some of the more important ones include:
Developing appropriate strategies that result in the achievement of stakeholder objectives.
Attracting, motivating and retaining talent.
Creating a secure and prosperous operating environment and improving operational performance.
Managing and mitigating risk and protecting and enhancing the company's reputation.
How can we improve CG in India:
According to a CG survey report by KPMG, whose participants were CEOs, CFOs and Directors of 90 leading companies in India, there are ways to improve CG by:
• 85 percent of the respondents think that the remuneration of CEO should be significantly linked to company performance.
• Most respondents believe that while steps at introducing the code of conduct and whistle blower policy have been introduced, there exists a significant need to enhance integrity and ethical values in the larger eco-system.
• 72 percent of the respondents believe it is necessary for an independent and transparent process to evaluate performance of board members.
• 66 percent believe that exclusive sessions of independent directors are essential.
• 47 percent feel that the effectiveness of corporate governance should be monitored through audits by corporate governance specialists.
Clause 49: Clause 49 of the listing agreement with stock exchanges provides the code of corporate governance prescribed by SEBI for listed Indian companies. With the introduction of clause 49, compliance with its requirements is mandatory for such companies.
According to the KPMG's report not many people believe that CG has improved significantly with the advent of clause 49. An excerpt from the report explains it well:
What most of the people do believe is that this clause can be significantly improved with slight modifications viz:
The penalties considered for improper CG are not strong enough to prevent people from unfair activities. The image below shows what experts believe:
One more factor more such a low level of confidence in the clause 49 is inefficient audit committees. People in the top management find these committees to be very laggard when compared to those in other developed and developing countries like China. Their view is:
The above graph clearly shows the level trust that high management people show in audit committees. This is also the reason for frequent corporate scams like Satyam, Citi bank etc.
Road ahead for India: In order to ensure a safer future, certain factors should be taken into account like:
Linking CEO rewards to performance: This will ensure better participation and care for shareholders on the part of CEOs.
Integrity and ethical values: Indian companies have been focusing on code of conduct and whistle blower mechanism as a fundamental of good governance. Still, majority of the people feel that although Indian companies give similar importance to integrity and ethical values, significant scope exists to enhance integrity and ethical values within the organization and the eco-system.
Improving corporate governance levels - some positive steps: Many believe an independent and transparent process to evaluate the performance of board members can improve corporate governance. For this exclusive sessions should be conducted with independent directors, and board members related to the promoter group should not vote on the appointment of a director related to the promoter group.
Monitoring effectiveness of corporate governance: These CG policies should be monitored regularly and continuous improvements should be done to ensure they work effectively.
The graph below explains a similar need as felt by industry practitioners:
It is evident that these tendencies would be strengthened by a variety of forces that are acting today and would become stronger in years to come:
Deregulation: Economic reforms have not only increased growth prospects, but they have also made markets more competitive. This means that in order to survive companies will need to invest continuously on a large scale.
Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital.
Institutionalization: Simultaneously, the increasing institutionalization of the capital markets has tremendously enhanced the disciplining power of the market.
Globalization: Globalization of our financial markets has exposed issuers, investors and intermediaries to the higher standards of disclosure and corporate governance that prevail in more developed capital markets.
Tax reforms: Tax reforms coupled with deregulation and competition have tilted the balance away from black money transactions.
While these factors will make the capital markets more effective in disciplining the dominant shareholder, there are many things that the government and the regulators can do to enhance this ability:
Disclosure of information is the pre-requisite for the minority shareholders or for the capital market to act against errant managements. The regulator can enhance the scope, frequency, quality and reliability of the information that is disclosed.
Regulatory measures that promote an efficient market for corporate control would create an effective threat to some classes of dominant shareholders as discussed earlier.
Reforms in bankruptcy and related laws would bring the disciplining power of the debt holders to bear upon recalcitrant managements.
Large blocks of shares in corporate India are held by public sector financial institutions who have proved to be passive spectators. These shareholdings could be transferred to other investors who could exercise more effective discipline on the company managements. Alternatively, these institutions could be restructured and privatized to make them more vigilant guardians of the wealth that they control.
Finally to conclude we can say that a lot of scope for improvement is available provided they come on time. For this to happen we should have good leaders as,
"Governance and leadership are the yin and the yang of successful organizations. If you have leadership without governance you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership you risk atrophy, bureaucracy and indifference."
- Mark Goyder, Director of Tomorrow's Company
