Public sector undertakings (PSUs) in India have always been under fire for poor financial performance. Their supporters, however, have persisted with the argument that the public sector upholds public ideals of responsibility. But what do we say when they fall short even on that? A recent compliance audit report published by India?s Comptroller and Auditor General (Cag) is an embarrassment to all champions of this sector. PSUs are shabby adherents to corporate governance norms. The audit reviewed their compliance with the provisions of the Companies Act of 1956 and guidelines of the Department of Public Enterprises (DPE) relating to the number of independent directors on company boards and the constitution and composition of audit committees. The scenario is dismal. Of the 44 listed companies reviewed, as many as nine had no independent directors whatsoever, while the number of independent directors fell short of the norm in another 21 companies. Unlisted PSUs fared no better, with 48 of the 223 units reporting a complete absence of independent directors, while another 16 did not meet the minimum. Unacceptable deviations from governance norms were also found in the case of audit committees. These are state-run companies, so what explains this slackness?
The default assumption is that the government has failed to issue clear directives on the appointment of independent directors on PSU boards, which in Cag?s own view is the most significant pointer to good corporate governance. Charitably, it could also be assumed that these PSUs were simply unable to find qualified and interested people to fill the vacancies on their respective boards. If the private sector is having so much trouble, maybe the public sector would have even more. Public sector compensation levels are too low to interest anyone who can just as easily gain a private sector directorship. Still, this is not a state of affairs that should be allowed to go on for very long. It is clear from experience that having independent board directors is a good way to insulate PSUs from the whims and fancies of the nodal ministries under which they operate. There is no better way to protect a PSU?s management from political interference than the oversight of alert people of integrity and commitment.
