'Are stricter corporate governance laws required?'

As in the case of terror attacks, there is a demand for stricter laws after each scam. But, as other countries have shown, better regulation of existing laws is good enough.

NEVILLE M DUMASIA
ED & Head, Governance, Risk and Compliance Services, KPMG, India

More regulation has not improved corporate governance — some alterations are fine but why reinvent the wheel?

Global accounting scandals in the west at the turn of the century resulted in a proliferation of regulation, most notable amongst them being the Sarbanes Oxley Act of 2002. Recent upheavals in the financial sector have conclusively proved that increased regulation has not improved the quality of corporate governance. Secluding risk management as a back office function, the failure to embed risk thinking and the lack of industry and functional knowledge amongst boards including audit committees have all contributed generously to this situation.

 

To be fair, India Inc has pro-actively strengthened its corporate governance rules mainly through the introduction of the amended Clause 49. The Companies Bill, 2008 also includes provisions aimed at improving corporate governance such as vesting shareholders with greater powers through special resolutions for a number of matters, stricter measures for investor protection through audit committees, independent director requirements, etc. These measures are complemented by greater emphasis on self-regulation, minimisation of regulatory approvals and, increased and more transparent disclosures. The existing and ensuing legislations do cover the fundamentals of effective corporate governance and India compares favourably with most other developing and Asian economies in this respect.

India has over 8,000 listed companies and an overwhelming majority of them are promoter-driven with a good splattering of retail investors. The twin objectives of corporate governance should be to take decisions in the best interests of a wide group of stakeholders together with seeking to achieve consistency in exemplary corporate behaviour that does justice to the substance behind the rules. Corporate boards and specifically the independent directors on the board have a major role to play in achieving these objectives through the principles they adopt and the practices they follow. Some key areas that India Inc needs to pay attention to are:

 

 

 

 

Transparency, objectivity and rigour in the processes to select independent directors. 
 

Current limits on independent directors are unrealistic and it is likely that many independent directors may fail to do justice to their commitments. 
 

The conduct of board meetings needs introspection in terms of frequency and duration, information needs, balance between presentation and discussion, interaction outside the boardroom and consultation when in doubt. 
 

The CEO and board chair roles should be segregated. 
 

Board chairs should actively monitor how individual directors are pro-actively identifying and fulfilling their knowledge and competency needs. 
 

Nomination committees and/or board chairs should drive the full board self-assessments and director performance assessments. 
 

Code of conduct norms should be communicated to the wider stakeholder group. All whistle blowing should be linked directly to the Audit Committees. 
 

The Audit Committees should get deep into the numbers, accounting policies, how they stack up against industry trends and why there are differences. 
 

Auditors should be asked to prove their understanding and evaluation of risks. 
 

Boards should have a bigger say in the metrics to measure performance. 
 

Regulatory bodies must carry out periodic checks to ensure that regulations are are actually being practiced.

The views expressed are personal and do not represent the views of KPMG

SOMASEKHAR SUNDARESAN
Partner, J Sagar Associates Advocates & Solicitors

Using ‘house bankers’, where a securities firm has to vouch for all compliance requirements of listed firms, is a big help

Governance is not a virtue in India — in any walk of life. The story with governance of corporates cannot be any better. There is little point in prescribing ever-more cumbersome requirements on companies if the basic culture of compliance is absent.

We are an over-regulated but under-enforced system. Recent developments will lead to an even more stringent set of laws being made, but to my mind, without effective enforcement, little purpose will be served with that approach. Every time there is a disaster in the system, there is clamour for action. However, insistence on accountability is a short-term culture in India.

“Show me a problem and I shall write you a law” is the general approach we have followed so far. We ought to resist that temptation this time too. Instead, effective enforcement alone could do wonders with the laws that we already have. Singapore has a criminal law that is identical to the Indian Penal Code. Singapore has managed to maintain society with far lesser crime. The difference lies in the effectiveness of enforcement.

There are indeed areas in which we can improve. For instance, when a company makes an initial public offering, the quality and extent of disclosures it makes is enormous. However, after the company gets listed, the quality of disclosures either under the listing requirements, or in the annual report is nowhere near the same as an IPO document. One simple measure that could be implemented is an obligation to file a prospectus-type detailed disclosure document that would have to be prepared with diligence by third parties and therefore bring in accountability in the contents of what is stated.

Some jurisdictions have had a system of mandating the appointment of “house bankers” where one securities firm is responsible for disclosures and compliance requirements of a listed company round the year. Because the securities firm’s neck would be in the line, it would engage advisors who would help it carry out its tasks and as a result, the listed issuer would be far more compliant and well known.

Another area where we could improve is the quantum of penalty for individuals who bring down institutions. Penalties in the Indian Penal Code and in the Companies Act have not been “marked to market” for ages and consequently, the perception that crime can pay remains alive. However, we do have laws that do contain stringent penalties and consequences. The penalties provided for in the Securities and Exchange Board of India Act are stringent and expensive. They can effectively be used to ensure that crime does not pay.

There are two principles one has to bear in mind. First, in trade and commerce, there is a necessary presumption of bonafides. If one has to suspect every letter of credit and every bank guarantee, can there be any free flow of trade? Second, fraud vitiates all solemn acts. Frauds will occur wherever the human mind is at work. Even in stringent jurisdictions where not only regulators are perceived as “tough” but the court system also works very fast and huge damages are awarded, frauds continue to take place. The answer is not to write more laws, but to take a step back and review how better we can enforce existing laws.

Therefore, what we need is better enforcement to enable corporate governance. I fear that a “tougher” law that is drafted in haste will be as awful as the anti-terror laws that people clamour after every terror attack. Such laws have only resulted in abuse and have not effectively dealt with the mischief sought to be suppressed.