Corporate governance is all about fairness, accountability, transparency and welfare of shareholders and stakeholders. It is vital for the integrity and efficiency of financial markets and however is beyond the accuracy of the balance sheet alone. It implies a well-defined, well-structured and well-communicated system to manage, direct and control the conduct of a company. But there?s many a slip between the cup and the lip as the unfolding Satyam saga has showcased.
Beyond jargons
It is established that corporate governance is a minimum requirement of any business ? big or small. Companies must establish an appropriate corporate governance structure as part of their traditional activities as it simply is an essential cost of doing business. But Enron, WorldCom, Satyam and many others have revealed how corporate governance is still misunderstood. As Lauro Vives, CEO and Chief Analyst, XMG Global ICT Research and Advisory, Canada shares, ?Despite the various corporate governance models that exist in the global industry, what seem to continuously be neglected is the corporate governance principles addressing ?direction orientation and continuing education? as enforced by the New York Stock Exchange (NYSE). He also recommends that the India?s stock exchanges enforce such governance practices to achieve better corporate fairness.
Nevertheless the fact remains that corporate governance is far more practice than theory. And on the practical front there are many a pitfalls in its formulations and functioning. As Professor Lawrence E Mitchell, Director Institute for International Corporate Governance and Accountability, George Washington University Law School, Washington DC points out, ?The development of corporate governance rules is far more a function of courts and legislators responding to the needs of businessmen than it is of any planned programme. A development that has had an effect in the courts is the notion that directors are agents of the shareholders, which is untrue and remains largely unarticulated as a legal matter but has affected the way courts view the role of directors.
This is unfortunate, for it takes the court?s focus away from governance ideals that may be most productive for the long-term health of the business, its ability to supply its products, the welfare of its workers, and the like, and focuses solely on stock price which in the long run may severely damage the business.?
Legal eye
Experts believe there are many a drawbacks in the system that require immediate attention. As Rahul Singh, Assistant Professor of Law, National Law School, Bangalore confirms, ?Unfortunately, the current corporate governance norms are borrowed from the West where the problem is usually because of dispersed ownership of capital amongst small shareholders and managers who run the day-to-day show. Western corporations follow the Berle and Means model and hence the agency cost could be addressed through Sarbanes-Oxley Act and Cadbury Committee recommendations that suggested Audit Committees overseeing financial statements of corporations. While in India the Naresh Chandra committee was looking at corporate governance reform way back in 2002-03, it was clear that imprisonment of directors is undesirable as that would lead to a chilling effect on the pool of potential directors.?
The fact remains that there are laws, and means to get around it. As Singh questions, it is trite to suggest that no Indian politician has ever been imprisoned for fraud. But, so is the case of business people! Indeed, the trial is so slothful that someone like Harshad Mehta escaped punishment by merely outliving the time period for trial. Although Clause 49 of SEBI that was pitched to bring in the much needed reform in corporate governance too is proving to be not enough. As the law has not been adequately and stringently implemented companies have a feeling that they can get away everything. As Pavan Duggal, Advocate Supreme Court of India, points out that the need of the hour is stringent implementation of Clause 49 and the compliances with the Information Technology Act 2000 and the Companies Act. Compliances pertaining to electronic records and electronic evidences need to be given paramount importance as they facilitate companies to fudge electronic records and accounts. Due diligence norms in the wake of the recent amendments to the IT Act, 2000, need to be updated to incorporate the existing realities of corporate India. And the Satyam case can be a testing landmark opportunity for Indian law, to prove itself.
The way ahead
Though most believe corporate governance as a way of business life is yet to take root in India. As Professor Meena Galliara, head, Social Enterprise Cell and the Faculty for Corporate Governance, Narsee Monjee Institute of Management and Higher Studies, affirms, ?It is unfortunate that corporate governance regulation has taken on a strict form without any commensurate conviction on the part of corporate leadership. This has led to regulations being followed as a mere ritual. Ethical behaviour is not an output of codes of ethics or codes of conduct, it is a human activity shaped on a daily basis by the existing organisational social framework.?
A sentiment also echoed by Manoj Vohra, Director Research, Economist Intelligence Unit, ?Appropriate regulatory interventions are essential, but the right mindset and culture are paramount. Promoters must understand that as shareholders and investors become more aware, good corporate governance will result into share price premium. Conversely, investors will discount organisations with poor track record in corporate governance. Regulators, on the other hand, need to be progressive, yet pragmatic. Hasty regulation and overly strict internal procedures may impair companies? ability to run their business effectively.?
Corporate governance in India has evolved over the past decade, but it still has a long way to go. As Vives reasons, that as Indian companies are becoming trans-national players in several industries they need to be globally credible especially in the IT, BPO and manufacturing sectors, and hence there must be government initiatives to reduce corruption which will drive the demand for increased visibility, transparency and reporting ? although no amount of legislation can guarantee high-quality fiduciary behaviours. This is also true of large Indian firms seeking joint ventures with foreign partners or IPOs, as well as state owned enterprises seeking privatisation.
Needless to say that efficacious corporate governance will go a long way in offering an opportunity for India to differentiate itself from other emerging economies, particularly China. We have our laws in place but will we develop the right temperament to adhere to them in the future would remain the big question.