How To Be A Good Company

The code correctly focuses on the composition and duties of boards of directors, and especially of non-executive directors who are generally seen as being crucial to the adoption of better practices. The authors have accepted the Anglo-Saxon concept of governance being aimed at maximising long-term value for shareholders, arguing with some sense that the Continental and East Asian aim of benefiting a broader community including employees is less relevant in India, where employees have strong legal protection and shareholders and creditors do not. Most people will agree with a lot of the recommendations: that India does not need to adopt the German practice of having two-tier boards; no individual should hold more than 10 non-executive directorships; a non-executive director should know how to read a balance sheet and profit and loss account, unless he is there as a scientist or a technical person. The code specifies the minimum proportion of non-executive directors in case the chairman of the company is non-executive (30 per cent) and in case the chairman is also the managing director (50 per cent). The British code, on the other hand, merely states that there should be a strong and independent element on the board and enough non-executive directors of calibre so as to make a difference. Whatever the specifics, these would be moves in the right direction because the greatest hindrance to better corporate governance in India is a rubber stamping board where an independent director can expect not to get re-elected if he asks too many questions.

 

Disclose more

Another key to better practices is better information. The code lists data, from annual plans and budgets to tax claims and labour problems, which a management ought to give its board. This should give teeth to boards which have so far been told exactly as much about a company as its management desired. There are detailed proposals on audit committees of boards. On disclosure, the code makes a long list of the information sought by the working group on the Companies Act (the CII recommendations have been made on the basis of a report by Omkar Goswami, who also helped to draft the Companies Act report) and helpfully adds three more items details on the companys share prices, value addition by the company and greater details of divisional performance. Most widely welcomed will be the proposal that domestic and foreign issues should be accompanied by the same level of disclosure.

However, the code becomes questionable and turns into a funny animal when it includes recommendations which are little more than demands for government action not the job of a document intended to be adopted by the corporate sector voluntarily so that the shareholder can separate the men from the boys. The first in this genre is to recommend that if a company publishes consolidated accounts, it should not have to publish those of its subsidiaries. Next comes the suggestion that the government should allow greater funding to the corporate sector against the security of shares, something just announced in the credit policy. The most serious recommendation is that financial institutions should not have nominee directors on the boards of assisted companies unless there is a debt default. Whether a lender has directors on the borrowers board is a matter to be settled between them.

The code does zero in on the appalling role of Indian financial institutions which have been oblivious to the need for better corporate governance. It questions the wisdom of institutions being majority government-owned, as that seems the best prescription to deprive both the ordinary shareholder and the institutions of good value. But the last recommendation, which calls for a reduction in the number of companies with nominee directors, is hardly likely to solve the problem, since whatever nominees remain will always vote in a controversial situation according to the wishes of the finance ministry. This recommendation has clearly been dictated by the desire of Indian owners to get nominee directors off their backs without really worrying about corporate governance. In contrast, the British code notes that institutional investors have a unique role in enforcing better corporate governance by voting positively and disclosing their voting policy.

Observe the code

Perhaps the finest part of the report is its concluding remarks which dramatically outline how time is catching up with Indian companies and how, with foreign pension funds and leveraged buy-out funds waiting in the wings and capital account convertibility round the corner, Indian companies will have no option but to conform to best international practices. The report says it goes beyond the duty of boards and non-executive directors in view of this impending scenario. But most good corporate governance revolves round those two factors as well as auditing and disclosure norms.

The report, in making recommendations on what the government should do, seems to have gone off at a tangent. The primary issue is how the board keeps a check on the management of a company, through independent directors who will not be steamrollered by the nominees of the management. Once audit and remunerations committees, manned mostly by independent directors, become part of the process, the ordinary shareholders interests will be better served. It will now be interesting to see whether CII members do indeed begin to adopt the codes recommendations and so begin to serve their shareholders better or whether the report will gather dust like so many other good intentions.