Before one goes further, it has to be understood that the term "corporate governance" by itself is a neutral concept and has existed as long as there were corporates. Even, today, a system of corporate governance does exist as provided by law. The debate, of course is not about legal corporate governance but about "good" (or "bad") corporate governance.

The traditional concept of a company stems from separation of ownership from management. The scattered shareholders will provide the money while the management selected by it will oversee and run the business of the company. Thisenabled channelisation of otherwise idle or underutilised funds into markets were drafted with an intention to provide safeguards both system works to the advantage of both. To the shareholders, assurance was given that they could remove the management whenever they wished and put a new one in place. The management had to come to shareholders for every important decision that had to be made. The management was bound to provide the firm's accounts and report to shareholders. The accounts had to be audited by an independent auditor and this was another important safeguard for the shareholders since in the normal course they would not be able to go through the accounts expertly nor would it be desirable to permit any sundry shareholder to have full access to the firm's detailed accounts.

While this is the "legal" system of corporate governance and, to its credit, it has worked, sometimes fully or sometimes in part, experience has shown that in recent decades it has increasingly shown signs of failure. It isnow realised that the management with low stake and full control has a temptation to misuse the control, more so if the shareholders are passive. The most important realisation is that shareholder democracy is more of a myth and is extremely difficult and costly to bring together a group of shareholders to take concerted action against the management. With the help of savvy lawyers, management was found to have been able to find loopholes in practically every provision intended to protect the company and the shareholders. The provisions, for example, for inter- corporate loans and investments, even before the recent amendments, were strict enough but ways were easily found to get around them. One unhealthy trend observed was that this resulted in a race between the law makers and the law-avoiders with the latter having the expected edge. In any case, statutes like the Companies Act, 1956, were not easily amenable to repeated changes.

Another pillar of the legal framework of good corporate governance, theauditor, also found fingers pointed against him. The fact that the company often paid him fees for services other than audit and the extent of such fees was at times even more than the audit fees became a cause for concern as to where does this leave the independence of the auditor. This is not to mention the so called "consultancy companies" floated by the auditor or their associates who also receive fees from the company and which may not be disclosed. That apart, though the legal framework rightly provides that the auditor will be appointed by a resolution of the shareholders, the reality is that it is the management who proposes the name of an auditor and often than not, the passing of the resolution appointing him is a mere formality.Thus, it was found that, over a period of time, the management was able to practically ignore the shareholders and run the company as per their wishes and even to the extent of harming the other shareholders interests.

Of course, this was being found and felt all over theworld. It was found that management resisted hostile takeovers though it was in the interest of the company to accept the bid and though the shareholders would have thereby gotten a far better price. It was found that the management rewarded themselves with mammoth salaries and even heftier perks, not to mention stock plans and options - this, even at a time when the company was facing a downtrend. Profitable divisions were hived off to companies fully owned by the management - in other words, the company took the risk of starting a venture, but if it was successful, the rewards are reaped exclusively by the management.

The initial (and continuing) reaction was of having even more strict laws. The recent amendments in the "liberalised" laws also reveal this. In many cases, managements found ways to avoid even these laws. However, generally what happened that the laws crippled the operations of all companies. A simple liberalisation measure like buyback of shares shows that the requirements were made sostrict, under the fear of the scheme being misused, that not a single company has found it enough worth to implement it as the provisions stand presently.

The author is a Mumbai-based chartered accountant