Corporate Governance In India
Corporate governance implies the governance of a corporation by its board of directors. It means the functioning of the board of a company and the conduct of the business internally and externally at all levels of management. Corporate governance does not mean the mere appointment of a few outside (non-exclusive) directors to keep an eye on the rest of the business or the formation of an audit committee of the board to act as a watchdog. Nor does it mean just a code of conduct. All these are elements in a total system of governance that will ensure genuine accountability of the management and the board to the shareholders and the public at large.
It has to be based on transparency in the systems of recruitment, training and remuneration of managers, well-defined delegation of functions with corresponding control systems, succession planning right up to the board and the CEO level, and transparency in the selection and appointment of executive directors including the CEO and a system for the assessment of their performance. It will involve transparency in the financial and management accounting, and auditing systems.
Subsidiaries of international companies like Hindustan Lever or Glaxo which have an external parent company (also professionally managed) inherit the disciplines of corporate governance from the parent company. The relative virtuousness of such subsidiaries is like that of a nun in a convent who maintains such disciplines that temptations are hardly allowed to present themselves. In the case of ITC, it was because BAT chose to abdicate its control over the business and its brands, and become a minority shareholder that the business became vulnerable to deviations. It became a nunnery without the disciplines of a convent.
However, most companies in India are not subsidiaries of professionally managed companies Indian or foreign. Furthermore, the external institutional shareholders in India are either unfit or unwilling to impose any such disciplines of governance on corporates. Therefore, corporate governance in India can and will evolve only as our companies increasingly become professionally managed and institutional shareholders become more competent to influence their performance and conduct.
Why the sudden interest?
This has been triggered by a confluence of exposures of corrupt practices that link businessmen and politicians who are being prosecuted and sent to jail. Imminent drama was added with the imprisonment of two past chairmen and several directors of ITC. The unholy links between business houses and politicians have been well known ever since Mrs Gandhi established them in 1970. Yet there had never been the kind of collective anxiety of the sort exhibited now. The current corporate insecurity is because the context has now materially changed.
(i) The first change is an almost unrecognised fallout of the reforms process (which involved the removal of very large areas of discretionary powers of regulation by politicians and bureaucrats) viz. a similar and parallel liberalisation of the political process in India.
(ii) Secondly, there is a much higher level of confidence among citizens about combating corruption. The emergence of public interest litigation and the resultant judicial intervention have really set the cat among the pigeons. The more frequent changes of government make the possibility of exposure of misdeeds even greater.
(iii) Thirdly, it has been forcefully brought home to businessmen that such exposure can result in unpleasant outcomes, as shown by the ITC case.
We should have no illusions about the reason for the newfound interest in corporate governance. It is purely based on the anxiety about the vulnerability of businessmen in the new context. Such anxiety is a much more forceful incentive for good behaviour (read corporate governance) than mere do good exhortations about dharma or trusteeship.
India and the West
There are considerable differences in the evolutionary stage of business here as compared to the West. Unlike in the West, there is still a large number of big business houses here, which are dominated by ruling families whose interests often take precedence over those of other shareholders.
Secondly, there are no independent and powerful institutional shareholders who feel that their primary duty is to the shareholders, and are able and willing to enforce this duty. In India, such institutions with significant voting rights are almost entirely owned by the government. Their priorities are often influenced by the interests of their political masters.
In contrast, the large pension funds and insurance companies in the US or the UK, which have shareholdings in most large companies, are managed by professionals who monitor the performance of the investee companies. Their right to manage the funds depends on the performance of the investments. They meet with the chairman and senior management of important investee companies periodically to get a first-hand impression of the companies management and their performance.
The third and probably the most important difference is that we have a genuine dearth of competent professional managers and independent non-executive directors.
These differences are not going to disappear soon and this must be borne in mind. Let us examine what can be done in India within the limitations outlined above.
Internal issues
Indian companies which want to adopt some of the principles of corporate governance can take certain steps to make the boards more effective.
Composition of the board: It is necessary to induct some non-executive directors who have not only business experience but are also independent enough to question proposals brought forward by the ruling family. Government-owned FIs can make a significant contribution by identifying and persuading a panel of eminent business managers (not necessarily only retired ones) who may be willing to serve as non-executive directors. In the UK, the Bank of England had sponsored an organisation called Pro-Ned for promotion of non-executive directors and Adrian Cadbury headed it for some time. Pro-ned contacted select people who were executives on the boards of good companies and placed them on a panel of available potential non-executive directors. When companies need non-executive directors they contact Pro-Ned. In India, RBI can take the initiative to promote a body to select and persuade executives to join a panel of possible non- executive directors.
Retirement age: In public limited companies it is desirable to have a stipulated retirement age for executive and non-executive directors whether they are family members, or outsiders or full-time professionals. While full-time professionals can have 60 as the retirement age, family members and non-executives including the chairman must retire compulsorily by age 70 at the latest. Unless family members also adhere to this retirement age, it will have no meaning.
The chairman & CEO
The functions of the chairman & CEO have to be much better understood. Their roles can either be combined or separate. However, there should be no ambiguity about the respo-nsibilities of the two. The separation of roles will depend on (a) the history and culture and the stage of evolution of the company and (b) the CEOs personality. This is no perfect answer. But many companies find it desirable to separate the functions of the chairman and CEO to avoid dominance by one individual. Having experienced both roles, I would recommend a separation of the two functions viz. a non-executive chairman with a separate CEO.
Whether a chairman is called executive or non-executive, he is ultimately responsible for the performance and conduct of the board and of the company. If the company is not performing well or not conforming to ethical conduct, he will be held responsible as he has the ultimate responsibility to monitor the performance of the board and the CEO, and if necessary to change the individuals concerned.
The CEOs role is to be responsible for the executive operations of the business and its profitability. His right to manage the business within the remit agreed with the board has to be untethered. It is often helpful to have the chairman, if he is non-executive, physically located quite separately from the CEO so that there is no temptation for the former to interfere in day-to-day operations.
It is necessary and useful for the executive directors other than the CEO to have the opportunity to voice their opinions at board meetings even if their views are different from that of the CEO on certain matters. This is but an evidence of healthy and open discussion among members. The CEO should be skilful enough to get a consensus among his executive directors. At the same time, he should be confident enough to allow any unresolved differences to be aired at board meetings as they are better exposed, debated and resolved. This process of debating issues among board members is not common enough in India even in multinational companies, as we tend to defer too much to seniors.
External dimensions
Business ethics in any society are an extension of the general ethical standards of that society. Each society has its own acceptable levels of deviation from the absolute. These standards evolve and change as a society progresses, and therefore, there is no uniformity in the ethical standards among societies or countries. Correspondingly, business ethics also vary from one country to another. What is acceptable in Italy as normal practice in terms of tax evasion by business will be frowned upon in the rest of western Europe or the US. How does India compare with other countries in terms of social, as well as business ethics?
Petty corruption: Small-scale corruption has been endemic in India starting with the well-accepted traditional unofficial payments that have to be made to the patwaris in all land transactions. This tradition has now been extended to many other arms of government and public sector organisations.
Once can hopefully see an end to this type of corruption as the economy liberalises and government officials are paid better, and there are no more government monopolies in services like telephones. Till five years ago, Indian Airlines staff had to be bribed by poor workers returning from the Gulf to get a seat to Kochi. Today, with many private airlines operating, IA has lost its monopoly. The same will hopefully happen to telephones, electricity supply companies, railways, municipal services, health services etc.
Large-scale corruption: What we now see as extremely shocking instances of large-scale corruption by those in power is as old as the hills. Even the British, who had a professionally managed empire under the East India Company, had cases of large-scale corruption among its officials. Large-scale political corruption has its origins in Mrs Gandhis prohibition in 1969 of legitimate contributions by business to political parties. She did it to cut the ground under the feet of the Syndicate. Immediately thereafter, when she had to face elections in the early 70s, she needed money and sent her emissaries to collect what necessarily had become illegal cash. The instruments of licensing and price controls were used to generate such black money.
There are two fundamental reforms that business associations should campaign for to change this tradition. They are:(i)Further reduction in discretionary powers of politicians and bureaucrats by the formation of independent commissions,(ii) Government funding of elections to reduce the pressure on politicians to collect money.
Independent commissions: There is no doubt that some form of regulation is necessary in areas like telecom, power, petroleum and the financial markets. The issue is who regulates and how. The experience of most developed countries shows that such regulation of individual companies is best done by independent statutory commissions whose members are professionals and are appointed for a fixed period under an Act of Parliament.
The RBI and Sebi are examples of such bodies. In both cases their independence is variable depending on the professionalism of the finance minister himself and the character of the individual heading the regulatory body. It should certainly be possible to get such individuals to head statutory commissions for telecom, power and petroleum.
Government funding of elections
The major declared reason for politicians collecting money from businessmen is to fund elections. This can be eliminated by the government itself funding elections. For example, any political party which has got more than 10 per cent of the votes in a national or state election can be considered eligible for funding by government at the subsequent election. There can be a cap of Rs 50 lakh per candidate for parliamentary seats and Rs 10 lakh per candidate for assembly seats. These amounts will be paid every five years. Assuming that there will be three such candidates to be funded in each constituency, the total amount involved will be under Rs 900 crore for Parliament and under Rs 2,000 crore for assemblies i.e a total of under Rs 3,000 crore every five years or about Rs 600 crore a year. This is a relatively modest sum that can be accommodated in the Budget. Its disbursal and control can be administered by the Central Election Commission. Apart from reducing the scope for corruption, this will help attract more upright people to enter politics.
Finally, corporate governance embraces issues concerning internal as well as external governance. Indian corporations can adopt many of the practices in their internal workings for sound internal corporate governance, if the ruling families recognise the need to do so. Most of them will be tempted to move in that direction due to the emerging compulsions viz. (a) the increased awareness of the public and the shareholders (b) judicial activism and (c) the more probing business journalism which has now taken root in the country.
When it comes to governance of a companys relationships with the external world, especially the politicians, reformation will depend on changes in the political climate. Industry and business will have to take some of the initiatives for reform of the political process as well.
( T Thomas is chairman, Indus Venture Management Limited)