Corporate governance: a brief introspection
Clause 49 of the present Listing Agreement, which deals with Corporate Governance norms that a listed company should follow, was first introduced in the financial year 2000-01 based on recommendations of Kumar Mangalam Birla committee.
Thereafter, several amendments have been carried out to reflect the dynamics of the India Inc. corporate sector and the new dimensions for the protection of shareholders interests. No specific definition of what is Corporate Governance is available in any of the reports of the committees which examined the feasibility of introducing this system in the corporate sector.
N R Narayanmurthy, Chairman of one of these committees, appointed by Government, however, made an attempt to bring out the content of Corporate Governance as “the acceptance by management (of corporate sector) of the alienable rights of the shareholders as the true owner of he corporation and of their own as trustees on behalf of the shareholders”. It is about commitments to values, about ethical business conducts and about making a distinction between personal and the corporate funds in the management of the Company.
CONCERNS/ISSUES RAISED
The CG norms are concerned with code of values and principles which guide a person to select between right and wrong and to adopt that course of action amidst various alternative options and conflicting interest of various parties which seeks to benefit greatest number of stakeholders. Easier said than done, it often requires handling pressures from many levels and therefore the best practices about the governance can not be achieved merely by doing regulatory changes especially when a major chunk of companies are family owned and have vested interests in their minds.
Few considerations which have been considerably highlighted in the recent past in this respect are:
1. Code of conduct and whistle blower policies are important, but more important is how they are communicated and practiced.
2. The concept of independent directors sounds good in theory but more important is the process underlying the selection of independent directors – is this process rigorous, transparent, objective and aligned to company’s needs? Appointment is generally endorsed by promoter/principal shareholder or by the Chairman/CEO – how can any such director be independent if he/she will have to look for the support of the principal shareholder for his election as a director.
3. It is important to focus on the ‘earnings’ but not ‘just earnings’. Focus on not just ‘How much’ but ‘How’, ‘At what cost’ and ‘at whose expense’.
4. Awareness in the directors that they are agents of shareholders and not of promoters and their position is one of trust and faith.
5. Role of the independent and Non-executive directors - do they see themselves as watchdog of all categories of shareholders and update and inform themselves accordingly?
6. Transparency and disclosure of executive performance criteria which includes both financial and non financial criteria.
While steps have been taken to take care of the legislative and regulatory landscapes to improve the corporate governance framework, in practice the implementation by companies of these measures to increase transparency and diversification of corporate culture has not yet occurred across the broader corporate landscape.
The suggestion mooted by a few is also that the thought of corporate governance should be aligned with the concept of ‘ethical governance’ since merely formalising corporate governance practices is not sufficient. Corporate governance is essentially a state of mind and a set of principles based on relationships. Ethical standards are based on a human consensus regarding what is the acceptable conduct; this consensus is not negated by the fact that the norms may be subject to interpretation in some situations. Corporate governance is not simply a matter of creating checks and balances; “it is about creating an outperforming organisation, which leads to increasing customer satisfaction and shareholder’s value.”
CONCLUSION
Ethical culture exists when a set of ethical values is shared by all the corporate members and is not only in the mind of some manager responsible for organisational ‘ethical issues’. The mere enumeration of the values sought does not usually suffice. The driving force to the conduct and the governance issues should be provided by the Board and senior officials who must show total congruence with ethical values in their daily activity with employees, clients, suppliers and shareholders. These notions can be reinforced saying that good corporate governance within organisations depends on the ethical quality of their leadership.
The author is an advocate at Link Legal, a law firm