Corporate Governance – A critical Analysis

Context

In light of Tata, Infosys, ICICI & PNB bank corporate governance episodes lately, the debate around transparency, role of Independent Directors, promoters etc among others got wide attention to further enhance corporate governance in India.

What is Corporate Governance?

• Corporate Governance deals with how a corporate is governed.Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled.
• Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

Need for a corporate governance

• Changing Ownership Structure
• Wide spread of investor
• Corporate Scams or Scandals
• Greater Expectations of Society of the Corporate Sector:
• Hostile Take-Overs
• Huge Increase in Top Management Compensation
• Globalisation
• Deregulation and capital market integration

Examples of failure of corporate governance in India

Harshad Mehta case: role of regulator

Satyam Scam: failure of auditing

ICICI bank: Conflict of Interest

PNB fraud: Internal Mechanism

Tata Case: Role of promoter

Infosys Case: Role of Independent Director

Corporate Governance in India

Post-Independence (Pre Liberalization) Governance: After Independence, governance practices were based on Gandhian principles of Trusteeship and the some of the direction received from the Indian principles of constitutions.Many corporates like JRD TATA has also imbibed these principles and established such a big empire of TATA group.

Post Liberalization Era:

Liberalization leads to wide ranging changes in both law and regulations. After the liberalization the establishment of the Securities and Exchange Board of India (1992) was very important development in the field of corporate governance and protection of the minority investors’ rights.

Post satyam scam (2007):Satyam scam is watershed moment for Indian Corporate governance. Post satyam there is a series of regulations brought up in terms of Auditors, Directors, Independent Directors, promoters as well as regulators to avoid any further debacle like Satyam.

Legislation to improve corporate governance

The frame work of Indian corporate governance is consist of various legislation and regulations like

• The Companies Act, 1956: All listed and unlisted companies in India are governed by the Companies Act 1956 and itis administrated by Department of Companies Act (now it is ministry of corporate affairs).
• The Securities Contracts Act, 1956:It covers all types of tradablegovernment paper, shares, stocks, bonds, debentures, and other forms of marketable securities issued by companies.
• The SEBI Act, 1992: It established SEBI as an independent capital market regulatory authority.
• Indian Companies Act 2013: key provisions of Indian companies act
• Maximum number of members (shareholders) permitted for a Private Limited Company is increased to 200 from 50.
• Section 135 of the Act which deals with Corporate Social Responsibility.
• Women empowerment in the corporate sector
• Fast Track Mergers and cross border merger
• Company Law Tribunal and Company Law Appellate Tribunal.
• The Companies (Amendment) Bill, 2017: The amendments under the Companies (Amendment) Act, 2017,are broadly aimed at
• addressing difficulties in implementation of companies act 2013
• facilitating ease of doing business in order to promote growth with employment;
• harmonization with the Accounting Standards, the Securities and  Exchange  Board  of  India  Act,  1992  and  the  regulations  made thereunder, and the Reserve Bank of India Act, 1934 and the regulations made thereunder;
• rectifying omissions and inconsistencies in the Act

Regulatory framework on corporate governance

• Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory authority having jurisdiction over listed companies and which issues regulations, rules and guidelines to companies to ensure protection of investors.
• Standard Listing Agreement of Stock Exchanges: For companies whose shares are listed on the stock exchanges.
• Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): ICAI is an autonomous body, which issues accounting standards providing guidelines for disclosures of financial information.
• Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of the provisions of the New Companies Act

Important Committees

• Rahul Bajaj committee(1995): The Confederation of Indian Industries (CII) had set up a task force under Rahul Bajaj. The CII came up with a voluntary code called “Desirable Corporate Governance” in 1998.
• Kumarmanlagam Birla committee report (2000): committee was set up by SEBICommittee covers the issues such as protection of investor interest, promotion of transparency, building international standards in terms of disclosure of information. The SEBI implemented the recommendations of the Birla committee through the enactment of Clause 49.
• Naresh Chandra Committee Report: It extensively cover Auditor-company relationship.
• R. Narayana Murthy Committee (2003): The committee was set up by SEBI to review the performance of corporate governance in India and make appropriate recommendations.
• Uday kotak Panel: In light of Tata and Infosys corporate governance episodes, SEBI appointed Uday Kotak panel to enhance corporate governance in India.

Key Recommendations of Uday Kotak Panel:

• A listed company should have at least six directors on its board.
• The panel has suggested at least one independent director be a woman.
• It also proposed that directors attend at least half the total board meetings held in a financial year. If they fail to do so, they would require shareholders’ nod for continuing.
• Companies have asked to make public the relevant skills of directors, and the age of non-executive directors has been capped at 75 years.
• In addition, the chairperson of a listed company will be a non-executive director to ensure that s/he is independent of the management.
• An independent director cannot be in more than eight listed companies and a managing director can hold the post of an independent director in only three listed companies.
• The committee has proposed to increase the number of meetings to five a year.
• Every board meeting would require the presence of an independent director.
• The committee has recommended that the number of independent directors on a company board be increased from 33% to 50%.
• Detailed reasons would need to be furnished when an independent director resigns. This is to ensure that they remain independent of the company management.
• An audit committee is being proposed with the mandate to look into utilization of funds infused by a listed entity into unlisted subsidiaries including foreign subsidiaries.
• The committee has also recommended that SEBI should have clear powers to act against auditors under the securities law.
• For government companies, the committee has recommended that the board have final say on the appointment of independent directors and not the nodal ministry.

Shareholder Activism 

• Around the world, there has been a considerable increase in shareholder activism in recent years.
• In line with global trends, India is also seeing a rise in shareholder activism.But it is at very nascent stage.
• Various legislations in India provide for several rights and remedies to minority shareholders in India. Companies act of 2013, provide more power to the minority shareholder in India.

Challenges

• It is common for friends and family of promoters and management to be appointed as board members.
• In India, founders’ ability to control the affairs of the company has the potential of derailing the entire corporategovernance system. Unlike developed economies, in India, identity of the founder and the company is often merged.
• Women director appointed are primarily from family in most of the companies which negates the whole reform.
• Appointed independent directors is questionable as it is unlikely that Independent Directors will stand-upfor minority interests against the promoter. In the Tata case, these directors normally toe the promoter’s line.

• An independent director can be easily removed by promoters or majority shareholders.This inherent conflict has a direct impact on independence.
• Data protection is an important governance issue. In this era ofdigitalisation, a sound understanding of the fundamentals of cyber security must be expected from every director.
• Board’s Approach to Corporate Social Responsibility (CSR) is often found unsupportive.
• Conflict of Interest – The ICICI Bank Ltd fiasco demonstrates the challenge of managers potentially enriching themselves at the cost of shareholders in the absence of a promoter.

Way forward

• For the good corporate governance focus should be shift from independent director to limiting the power of promoters.
• Promote women from diverse background rather than from family as board of director.
• Strengthening the power of SEBI, ICAI, and ICSI to handle the corporate failure. As for example in sahara case, court has to intervene to bring justice.
• CSR projects should be managed with much interest and vigour.
• The board must invest a reasonable amount of time and money in order ensure the goal of data protection is achieved.
• A robust mechanism should be developed to mitigate risk. A better management of risk may avoid Kingfisher like debacle.