Corporate Governance in India

Corporate governance is defined as the system by which business entities are monitored, managed and controlled. Corporate governance practices have become an essential prerequisite for the ability to acquire and retain financial resources necessary for restructuring long term investment and sustainable growth. At one end of the spectrum the shareholders are the owners of business entity as they are risk takers. At the other end the managers or the executive director of the company who are in control of its day-to-day affairs.

It is the responsibility of entire board of directors for smooth running of the company; corporate disclosure and governance requirements though relatively low in some countries, are also changing. Awareness of the developments of accounting standards, securities regulation, globalization of financial markets, world wide effect of corporate strategic alliance has led to some alternative view of governance process. A good structure of corporate governance is that encourages balanced relationship among shareholders, executive directors and the board of directors.

The governance mechanism is shaped by its political, economic and social history and its legal frame work.

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In the beginning most of the countries found company to be the convenient form of organizations that enabled entrepreneurs to raise money from large number of investors. Shareholders start agitating only when they perceive that the company is being highly mismanaged and the shareholder value is getting destroyed.

CORPORATE VALUES: In recent years, There is a explosion of interest in corporate values like share holder value (Rapport,1986; Copeland, 1994; Jensen, 2000), stakeholder value (Freeman, 1984), customer value (Murphy et al.

, 1996), business ethics (Velasquez, 1998; Fort,2001), Corporate social responsibility (Carroll, 1999). But by and large, new value systems have been marketed as general solutions applicable to all kinds of business. These values are building blocks of corporate image. Corporate values are based on high ethical standards of managers and other employees. The firm values must ultimately be derived from the preferences or values of its stakeholders. In other words, corporate values are created when companies internalize the values of salient stakeholders.

Stakeholders can influence a company directly through market transactions and contracts without imposing their values on the company, but transactional costs and information problems set a limit to use of contractual mechanisms. Internalization of stakeholder preference takes place in a hypothetical three-stage process as follows: 1. Allocation of ownership rights. 2. Board of composition. 3. The influence of important stakeholders There is also a logical casual connection between the stages. Ownership determines the allocation of residual control rights across potential owners.

The owners appoint board members and bestow the responsibilities to them. The board determines the nature of implicit contracts with the constituencies of the firm. Figure1: Legal/ institutional/cultural regime BASIC PRINCIPLES OF CORPORATE GOVERNANCE: The Business Round table supports the following guiding principles: 1. The main duty of the board of directors of a public corporation is to select a Chief Executive Officer and to oversee the CEO and other senior management in the competent and ethical operation of the corporation on a day-to-day basis.

2. It is the responsibility of management to operate the corporation in an effective and ethical manner in order to produce value for stock holders. Senior management is expected to know how the corporation earns its income and what risk the corporation is undertaking in the course of carrying out its business. Management should never put personal interest ahead of or in conflict with the interest of corporation. 3. It is the

responsibility of management under the oversight of the board and its audit committee to produce financial statements that fairly present the financial conditions and results of operations of the corporation and to make the timely disclosures investors need to permit them to assess the financial and business soundness and risks of the corporation. 4. It is the responsibility of the board and its audit committee to engage an independent accounting firm to audit the financial statements prepared by management and to issue an opinion on those statements based on Generally Accepted Accounting Principles.

The board, its audit committee and management must be vigilant to ensure that no actions are taken by the corporation or its employee that compromise the independence of the outside auditor. 5. It is the responsibility of the independent accounting firm to ensure that it is in fact independent without conflicts of interest, employs highly competent staff and carries out its work in accordance with Generally Accepted Auditing Standards. Another five key principles of corporate governance are as follows: (1) Peoples are more important than processes One lesson of recent corporate collapses in the U.

S. A and in Europe seems to be that no corporate structure can guarantee success if the individual with in it do not operate with the right degree of independence with the right kind of expertise and do not devote the required amount of time to the important role of executive director. The main thing is too many companies no executive directors are chosen for reasons quite unrelated to their suitability for the task. (2) Shareholders accountability. It is found that shareholders accountability does not always work as effectively as one would like.

It is because shareholders frequently do not vote on important resolutions. They do not vote on the appointment of Auditors and generally remains entirely passive until a crisis hits. In my view share holders must accept their own responsibilities if we are to achieve a truly robust corporate governance system. Shareholders should not abdicate their responsibilities to boards. So companies need active shareholders prepare to make their views heard. (3) The effectiveness of Audit. The external audit must be independent and penetrating.

The Enron case has already an important consequence for the Audit functions in U. S. A. It certainly appears that, in some cases, auditors have lost sight of their essential function as agent of shareholders and lost sight of public interest dimension of their role. If investors cannot be confident that the prime responsibility of the auditor is to his or her professional standard and to market integrity, then they will lose confidence will be reflected in lower share prices and higher cost of capital. (4) Disclosure and Transparency. The disclosure and transparency are crucial to market integrity.

Over the last 15 years as concern about corporate governance have grown, a series of codes of practice have been put together, largely by British companies themselves. Sir Adrian Cadbury designed the basic corporate governance code. Since it has been supplemented by another Greenbury code on disclosure of pay and together with a number of other requirements into the combined code, which has known as Hampel code. The main principle is that the companies should disclose in their annual report and accounts whether they meet the terms of these codes of good practice.

Remuneration policies are a particularly crucial feature of corporate governance today. Enron points up the danger of incentives for directors to take huge financial risk which bring immediate financial benefit to them and longer term disaster for the company. (5) Regulatory Discipline. The prime responsibility for developing codes of good corporate governance has rested with companies themselves. In fact the Bank of England simulated the first corporate governance code in U. K but since company has typically taken then the lead chairman themselves. The corporation has responsibility to deal with its employees in a fair and equitable manner.

These responsibilities and others are critical to the functioning of modern public corporation and the integrity of the public corporation and the integrity of the public markets. No law or regulation alone can be a substitute for the voluntary adherence to these principles by corporate directors and management and by the accounting firms retained to serve American corporations. In the nut shell effective corporate governance requires a clear understanding of the respective roles of the board and of senior management and their relationships with others in the corporate structure. BUSINESS GOAL & CORPORATE GOVERNANCE:

Corporate governance is also related to corporate financial goals. It is a naive assumption that such goals are culture free. Wimer (1995) interviewed Dutch, German, and U. S business executives. Besides making profits, the Dutch talked about assets, the German about independence from banks and the American about shareholder value. This reflects the institutional differences among the countries but also the prevailing ideologies. Some people assume that globalization and acquisition of companies across borders will wipe out such differences and thus business leaders will become like the Americans.

Others argue that these differences are rooted in national cultures that have centuries old roots, which make such convergence unlikely. The studies here were based on a comparison of institutions across countries. Another approach is to focus on the persons of the business leaders and to compare the goals they are seen to pursue. Corporate governance practices have become an essential prerequisite for the ability to acquire and retain financial resources necessary for restructuring long-term investment and sustainable growth. TRANSPARENCY-A way towards better governance:

This means accurate, adequate and timely disclosure of relevant information to the stakeholders. It is not at all possible to make any progress towards better governance without transparency. But it is seen that information sharing is hindered under the excuse of confidentiality. There is need to move towards international standards in terms of disclosure of information by the corporate sector and through this the companies develop a high level of public confidence in business. The scenario at international level makes transparency and disclosure the key pillars of corporate governance.

REQUIREMENT OF GOOD CORPORATE GOVERNANCE: According to the Australian standard on corporate governance (AS8000, 2003), it requires a structural component requiring identification of requirements, requirements of laws, codes, best practice, links to risk-requirement, and reporting, so as to create a functioning series of systems and a maintenance component requiring education and training, communications monitoring, assessment, review, liaison and accountability. But, note that corporate governance has neither a static, nor a prescribed form.

The Australian standard says, "there is no single model of corporate governance" (AS8000, 2003). The OECD principles of corporate governance (OECD, 2004) says "To remain competitive in changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities. The Nation Archives of Australia is a leader in developing records management procedures, particularly in e-records. One that is of particular interest deals with source records that have been copied converted or migrated.

This policy allows Commonwealth agencies to dispose of source records that have been copied or converted if proper processes are in place. But the procedure also requires, importantly, that the policy can be put in place only. If it has been implemented with the "explicit agreement" of the head of the agency. This means that the agency head must be satisfied of the integrity of the IT and administrative systems in place for the copying of the source records before the policy is adopted and source records are destroyed.

Boards and other governing bodies for records management throughout an organization should also undertake such high –level sign –off on records management policies. So requirement of good corporate governance may be summarized as follows: due process – doing things in an agreed, documented, controlled and appropriate way. transparency- doing things in a way which is open to appropriate way. Accountability- having to answer for the things one does. compliance- having systems to ensure that things are done properly. laws- meeting applicable legal obligations.

Security- having systems to ensure protection of information PURPOSE OF CORPORATE GOVERNANCE: The purpose of corporate governance includes the followings: (1) To enhance the reputation of a business/entity, which is in the public sector includes meeting expectations of model behaviours from public entities. (2) To comply with the laws and Acts. (3) To make the business entity more efficient and effective and to avoid disasters. PLAYERS IN CORPORATE GOVERNANCE: Corporate governance systems vary across countries and these differences directly affect both the process for developing global strategies that can be adopted.

Global strategic decision poses a very tough test for the effectiveness of corporate governance system. They seek maximize profit and global competitiveness. There are five critical stakeholder players that affect the company's decision. They are (1) Employees (2) The management teams (3) Shareholders (4) Board of directors (5) Government EMPLOYEES: The main variable differentiates employees as a collective group across countries. The country's labour market will influence the flexibility and mobility of employees. Country such as the U.

S that have employment at will where by a contract can be terminated at any time are likely to have flexible labour market and short term labour commitment. In more rigid labour markets such as Germany and Japan companies invest a great deal in bespoke in house training that tends to result in more highly skilled labour forces and company specific skills. These in turns are less transferable from one company to another. For example in France, the union rights are extended to all employees regardless of union affiliation. Here unionization will have greater influence on corporate decision making than in U. S or U.

K where only union members benefits from collective bargaining agreements. Japanese companies tend to have enterprise unionism, which leads to collective bargaining at company level, and grant a strong voice to employees. In 2004 for example employee opposition to job losses prevented the restructuring via. Merger with a foreign partner of France who is financially troubled Alstom, a major producer of ships and trains. In the same year Volkswagen despite suffering from very high labour cost had to promise its Western Germany employees job security until 2011 in exchange for a wage freeze until 2007 and more flexible working hours.

The company workers wield considerable power partly through co-determination rights that require employees to be consulted on corporate decision. TOP MANAGEMENT TEAMS : Managers in U. S and U. K tend to have professional background and strong functional background in finance or marketing. This is not the case in Germany where managers are more technical oriented. There is also variation in the international experience and background of managers. Managerial career mobility tends to be very fluid in U. S and U. K due to open labour markets.

In Japan and France managers tend to remain with a company for a long period of time. There is also wide acceptance of leaders from across boarders in the U. K SHAREHOLDERS: Countries vary in their mix types of shareholders. At one extreme the U. S and U. K have mostly arms length, natural shareholders who are focused on shareholder value maximization. Employee shareholders typically use their ownership to block the global relocation of jobs. This applies even in the U. S where united Airlines provide a rare example of a large public company with majority ownership (55 percent owned by an employee stock ownership plan).

This employee stake and hence control have greatly constrained the ability of the Airline to relocate job overseas. GOVERNMENT: Government intervention is usually in the form of market regulation. A representative measure for government intervention in the economy is regulation around takeovers. In countries such as France, Germany, Italy and Japan government intervention often provide strong takeover barrier such as golden shares, which bestow on the holder veto power over changes to the company's charter.

The variation hindrance to hostile takeovers in many continental European countries continues to make it difficult for foreign companies to make acquisition across border in Europe. In 2001 plans for a European takeover code, which would guarantee the right of shareholder to be consulted during bids were shelved following objection from German government. The previous year Vodafane, the U. K telecoms company made a successful hostile bid for Mannesmann, a German telecoms company and the German government was worried that other local companies might fall into foreign land.

For example Volkswagen is protected from takeover by special law. Sweden, which fall in the continental governance model that use multiple voting rights to help and prevent its companies from becoming vulnerable to takeover. France is also particularly active in preserving national ownership of major companies. In 2004 the French government brokered the takeover of Aventis a French Germany pharmaceutical company by France's Sanofi-synth and Laboratories. MANAGERS & CORPORATE GOVERNANCE: Top managers need to recognize that they are not in sole charge.

Global strategy is an equilibrium game among corporate governance players. Managers need to work on building coalition and aligning interest behind a common approach. In the continental system managers have to align trade off and meet other stakeholders' interest halfway. They have to craft their language and rhetoric to meet the other players' expectations. The main things here are consensus and social cohesion. In the extended (Japanese) system companies have generally capitalized in their export oriented model and high innovation driven employees loyalty.

But because of rigid of their corporate governance system, they have not exploited as much as they could different dimension of global strategy. So the system must be open in term of the diversity of the top management team and more flexible in their governance by introducing leaner boards as well as allowing greater levels of shareholder activism. If government care to sustain national competitiveness and to help their companies to globalize, then they should assess the degree to which the players in their corporate governance system are aligned with each other and with their intended global strategy.

Government policies should become less inimical to foreign owners and use such capital to provide the much needed global knowledge. This can only be accomplished if the right mechanisms are in place to give a voice to these foreign owners. The government has the responsibility as well as the policy tools to gear the country's corporate governance system so that it enhances national competitiveness. A VIEW ON ECONOMIC TIMES CORPORATE GOVERNANCE SURVEY: The Economic Times (ET) Corporate Governance survey uses the six parameters to evaluate the rank of the organization.

They are (1) accounting quality (2) Value creation focus (3) fair policy and actions (4) Communications (5) Effective governing board (6) Reliability. 40 companies are taken. They are ranked by 147 strong samples of top fund manager and brokers. The respondents were from Mumbai (46%), Delhi (20%), Kolkata (20%), and Chennai (14%). RESULTS: In Corporate Governance ranking of ET, Infosys Technology attains top position. Tata Steel in second position, HDFC in fourth, Tata Motors in sixth, Ranbaxy Lab, Hindustan Lever in tenth, State Bank of India in thirteenth, ONGC in sixteenth, Zee telefilm in thirty -eighth position respectively.