The corporate world has witnessed continued pressure for professionalisation of boards in the interests of better governance. Accordingly, the governance structure of corporations is increasingly getting aligned with the best practices in corporate governance. Good corporate governance ensures transparency, integrity, responsibility, accountability and long-term strategic plans, effective risk management plans and corporate social responsibility, or CSR. The term corporate governance has acquired special significance in the case of India's public sector enterprises (PSEs).
PSEs' corporate governance practices are robust, resting on four pillars - fairness, transparency, accountability and responsibility. Well before the corporate governance code was put in place, they were required to comply with several rules and regulations under an elaborate system of Parliamentary and governmental control. They have gone the extra mile and taken structured initiatives, beyond mandatory stipulations, for the benefit of various stakeholders. There have been several systems and mechanisms of compliance for ensuring accountability and good governance in PSEs.
Presently, apart from Parliament, PSEs are accountable to other authorities, such as the Comptroller and Auditor General of India, Central Vigilance Commission, Competition Commission of India and the Right to Information Act, etc. Besides, listed companies are governed by Sebi norms. These checks and balances have assured high levels of transparency in PSE functioning, and contributed to the greater investor confidence enjoyed by PSEs. This can be validated by the fact that a handful of PSEs (46 listed companies, i.e. one per cent of the total number listed on the Bombay Stock Exchange) account for around 15 per cent of BSE's market capitalisation.
PSEs have well-structured vigilance departments with network units across various regions with the mandate to disseminate principles and practices related to integrity and transparency across all levels of the organisation. More than 100 PSEs have also signed an Integrity Pact with Transparency India International. Under the MoU system, PSEs undertake to achieve targets set out in the agreement between their managements and the Government of India. Emphasis is placed on giving them operational autonomy to face competition, at the same time ensuring accountability in operations. The Right to Information Act is applicable to all public authorities and is also applicable to PSEs - but not to the private sector, thus denying PSEs a level playing field.
As guardians or trustees of public money, they have upheld high values to achieve the objectives for which they have been established. Their contribution to the economy can be judged from the fact that 290 PSEs with a total investment of Rs 9.92 lakh crore earned a net profit of Rs 1.29 lakh crore in 2013-14. Their turnover of Rs 20.61 lakh crore amounts to some 20 per cent of India's GDP. They contributed Rs 2.20 lakh crore to the central exchequer by way of dividend, taxes, etc. In addition, the contribution of central PSEs, or CPSEs (by way of taxes and duties, net profit, dividend, disinvestment proceeds) has increased by 149 per cent in the past decade (2004-05 to 2013-14).
Besides, PSEs have played a leading role in making positive interventions in social upliftment programmes. They are implementing their CSR activity in project mode, addressing the socio-economic development, environment, education and drinking water needs of surrounding communities. Development of backward regions, creation of industrial and social infrastructure, creating jobs for a large number of people, and production of essential products and services at a reasonable price speaks volumes of PSEs' CSR activities.
The commitment of the CPSEs towards CSR can be seen from the fact that of the top 100 companies' contributions to CSR activities, 25 are CPSEs. PSEs have been imparting the best practices in corporate governance. However, there has always been a tendency to term them non-compliant in some parameters of corporate governance. One yardstick of non-compliance that is pointed out is the appointment of independent directors. Before we comment on this non-compliance, we need to first understand how independent directors are appointed in a CPSE.
The institution of independent director has emerged as the cornerstone of corporate governance. It requires boards to be properly structured with adequate non-executive and independent directors to ensure independence and objectivity. They are expected to exercise oversight on the functioning of the board and board committees - the audit committee, remuneration committee, etc - based on best practices of governance and ethical standards.
At present, independent directors for 'Ratna' CPSEs (i.e. Maharatna, Navratna and Miniratna) are recommended by the administrative ministry to the Public Enterprises Selection Board, or PESB. The selection is then made by a search committee which includes the secretary, department of personnel and training as chairperson of the committee; the secretary, department of public enterprises; secretary of the administrative ministry, and two non-official members. The list of shortlisted candidates is then sent to the administrative ministry and, finally, for the approval of the Appointments Committee of the Cabinet. Since PSEs have no role in the selection of independent directors or audit committees or remuneration committees, it is unjust to hold PSEs responsible for non-compliance with Sebi regulations governing their appointments.
A professionally run organisation having a competent board and full operational autonomy can perform optimally and its members can be held accountable through a structured performance evaluation system. PSEs run on professional lines. Several Indian PSEs have become important players in the global market. To help PSEs to embrace global business standards and to improve their performance in a transparent and ethical manner, issues which are presently not within their control need to be addressed.
The world over, notable corporate governance reforms have been undertaken to strike the right balance between autonomy and state control. Some developed countries have created independent sovereign committees that are not under the control of the administrative ministry, to monitor implementation and succession planning and to select independent directors. In India also, there is a need to review corporate governance norms in line with worldwide trends. It may help improve investor confidence and enhance the competitiveness of PSEs.
In the past there have been a number of committees on reform of corporate governance. However, there has been a paradigm shift in governance norms after the global recession and meltdown in 2008-09. Since the government as owner and facilitator has greater importance in global competitiveness and best practices in corporate governance, the time has come to appoint a new committee on reform of corporate governance.
The writer is Director General, SCOPE
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
