Corporate Governance

CORPORATE GOVERNANCE :ORIGIN, EXISTENCE AND EMERGING TRENDS

1. INTRODUCTION

Business and Ethics are, in theory supposed to go together, but in real life it is a tumultuous relationship. In certain markets however, the market forces and trends have forced corporate enterprises to adopt corporate governance. For example, increased investor activity have ensured that corporates shape their practices to suit the nest interests of the stakeholders as well as shareholders. In India, Infosys is an example of a brand that is built on good reputation, and sound corporate practices. It is a long and often difficult path to attain such a position. But firstly one must understand corporate governance, what it entails, what are the parameters in which it operates, how is it influenced by extrinsic factors. So one cant proceed to practice corporate governance, unless one comprehends its theoretical constructs.

It is a phenomenon of recent origin, more so for India. In the wake of globalization, industrialization, various aspects such as parameters of accountability, control and reporting functions of directors are all encompassed in corporate governance. In recent years, there have been substantive changes in nature of corporate ownership on account of exponential growth of capital markets (both in terms of volumes and reach), activities of monitoring of corporate activities by financial institutions. With globalization, the impact of these changes is also global. Also the role of players like non-financial institutions, non-executive directors, managing directors, chairman, auditors, and the whole set of relationships with investors has changed.

What on earth is Corporate Governance then:

A corporation has been defined as “an ingenious device for obtaining individual profit without individual responsibility”. The term Governance belongs to the vocabulary of Political Studies. Here its import is that it is used to show the connection with better management of the corporate sector.

Corporate governance has attracted a great deal of attention because of its importance for the economic health of corporations. However, the concept itself lacks any widely-accepted definition, rather it is a mixed bag of ideas and thoughts. There is a certain kind of disorder in the meaning of the concept. However, that should not discourage one from indulging into a theoretical study of the concept. One can state some different definitions so as to get a better idea of the concept:

1. “Corporate Governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentives, mechanisms, such as contracts, organizational designs, legislations etc. for example, how the corporate owners can secure/motivate that corporate managers will deliver a competitive rate of return”

2. “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”

3. “Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders ad spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure though which the company objectives are set and the means of attaining those objectives and monitoring performances.”

The stakeholder may be internal stakeholders (promoters, members, workmen and executives) and external stakeholders (shareholders, customers, lenders dealers vendors, bankers community, government and regulators). So in such a system, the directors are entrusted with responsibilities and duties in relation to the direction of corporate affairs. It is concerned with accountability of persons who are managing it towards the stakeholders. It is concerned with the morals, ethics, values, parameters, conduct and behavior of the company and its management. However, to make it more popular, it has been advised that corporate governance practices be kept voluntary and not be thrusted upon an enterprise. Maximum shareholder wealth is the cornerstone of corporate governance, but not restricting oneself to shareholders or wealth generations, there are other more far-reaching facets too. For instance, respect for the environment, eco-safe practices are all part of better corporate practices which can be included in corporate governance.

A brief history of Corporate Governance

The genesis of corporate governance arises from the great business scams and scandals which are all to common in the recent past. The junk bond fiasco in the US and more recently, the shocking discovery of accounting malpractices of erstwhile accounting giant Arthur Andersen, to ‘please’ its client, the energy giant Enron. On these lines, the guiding principles, for better corporate governance, should be transparency and ethics. In 2002, the American government passed, quite hastily, the Sarbanes-Oxley Act to, amongst other things, untangle the auditing profession’s many conflict of interests. America’s security regulator, the Securities and Exchange Commission, also adopted new rules in January. But some feel, that despite such measures, the impact of scandals that rocked accountancy and auditing will not go always so easily. The problem is that almost all firms, get their accounting and auditing done by one the Big Four accounting firms. With the demise of Arthur Andersen, the big four are bigger than ever before. So a dangerous consolidation is major risk. So the regulation of industry would require something much more than a robust set of regulation governing their behavior. The international trends are discussed in greater details, further in the paper. Let us see what are the efforts which have been made in the field of corporate governance.

Work in Corporate Governance in India:

India has formulated codes of corporate governance through various committees, the more important ones being:

· CII code of desirable corporate governance (1998)

· UTI code of governance (1999)

· SEBI norms based on Kumar Mangalam Birla Committee Report on Corporate Governance (2000)

· Naresh Chandra Committee on corporate audit and governance (2002)

· Narayanmurthy Committee on Corporate Governance(2003)

Besides these, companies such as ICICI, BSES, Infosys, etc have created their own benchmarks. To get a feel of what they entail, let us take the CII code , as it one of the earliest works, on Corporate Governance in India. They recommended in their code the following:

(a) Key information to be reported

(b) Listed Companies to have audit committees

(c) Corporate to give a statement on value addition

(d) Consolidation of accounts to be optional

So from the above the key themes which emerge are: Transparency, disclosure and accountability. The same general themes run though the remaining reports, with certain changes. Some reports are more specific as they pick up one aspect and focus on that. Later in the paper the Naresh Chandra Committee report is discussed in greater detail, with its implications. While we are on the topic, one may mention some international efforts to promote better corporate governance:

Ø Sir Adrian Cadbury Committee on Financial Aspects of Corporate Governance (1992)

Ø Blue Ribbon Committee on improving the effectiveness of Corporate Audit Committees (1999)

Ø Combined Code of Best Practices (London School of Economics, 1998

Ø Hampel Committee on Corporate Governance (1998)

These are just a few major examples. To see what they entail, let is take up the American Blue Ribbon Committee report:

Ø Members of the Audit committee to be independent

Ø Audit committee to consist of independent directors only

Ø Audit committee to have a minimum of three directors, each to be financially literate.

Ø Responsibilities, structure, process, membership etc all to be approved by the full Board of Directors.

So the focus is on auditors. A point to be kept in mind is that auditors are external parties, professionals, they are not part of the company, like directors or managers, and yet they are being subjected to so much regulation. Other reports focus on aspects such as Financial reporting, Internal control, relationship with auditors, external auditors, auditors having dual responsibility.

Past performance:

The problem, world over has been that shareholders, have been seen, by companies only as a source of capital and nothing more. They play virtually no role in the determining the affairs of the company and only to a small extent do they act as a check on misuse of power by directors, or men in power. The reasons for this corporate malaise are manifold. To some extent, government’s policies are at fault, lack of skill of labor and management, cost of capital and even competition are culprits in their own ways. Some experts blame it on the weak dollar. The corporate structure has changed too. Specialization is the mantra. One doesn’t need to know how to make chairs to invest in a chair manufacturing company. All one needed was to buy some of their stock. But such a system works on accountability. The company has to produce returns or the investor will quit investing further. In India too, Institutional investors and other shareholders were passive investors and the companies were governed as family businesses. However, the situation is changing very rapidly, with mantras of Professionalism seeping into corporate though management circles. All are calling for qualitative improvement in corporate governance.

2 THE ENRON FIASCO AND ITS RAMIFICATION ON THE GLOBAL CORPORATE TRENDS

The bursting of Enron’s bubble and the expose of Arthur Andersen’s obsequies tactics, for its client, brought out new fears in the minds of people worldwide. With Arthur Andersen wrapped up, the fears of a repeat performance were not allayed in any way. What was left behind was a powerful clique of accounting firms, called the Big Four; and now they are bigger than ever before, as they have inherited Andersen’s clients too. This extreme concentration is a big headache for the regulators, as well as other watchdogs of the corporate world. These four firms audit nearly all publicly listed firms in America ad the vast majority of those in Europe and Japan as well. The problem is not merely with the auditing services provided by these ‘Big 4’ companies, but with the ancillary services offered by them-such as tax planning, and management consulting services. Statistics show that for such services they get fat fees; almost as much as they get from their primary services (auditing). New rules, in the US, bar auditors from providing clients with ancillary services, but the revenues from such services has shown only an upward growth trend. Some blame it on the government. “By requiring that all companies listed on the public stock exchange file audited financial reports, governments around the world have given accounting firms not only a unique franchise, but a public mandate”. A measure which has been pressed into service in US as well as in other nations, even India (as we say later in the recommendations of the Naresh Chandra Report), is that of Rotation. What rotation essentially entails is that there must be periodic swapping of the senior partners on audit teams. Those who don’t regard this measure as being of any use, take the argument that this measure is based on the naïve view that biased people are the issue and not biased firms and incentives. Rather what should be changed is the firm itself. If firms were changed every few years, by mandate of law, then auditors would themselves become independent. So, the key issue is of independence of auditors, which has become all the more evident and a cause for concern in the corporate world after the Enron fiasco. Some suggest a total and stringently enforced bar on auditing firms rendering non-auditing services.

2.1 GLOBAL ACCOUNTING STANDARDS

In emerging markets, as in advanced countries, performance, ethics, honesty, transparency, accountability, independence and quality, they key features of effective ‘corporate governance’ are crucial . effective corporate governance is the benchmark for transparency and disclosures’ in financial reporting; otherwise incompetent and fraudulent performance will not only go with impunity, but will be given fillip. The external audit process provides an independent check on the quality of these reports, limiting the effects of moral hazard problem to which directors might be susceptible. Directors, in turn have to monitor management and some management accounts serve this purpose by passing information from managers to directors, as well as being the basis for decision making and rewarding managers. The management accounts, in turn are often validated by a process of internal audit. Audit committee formed under the Cadbury committee, in UK (1992) was made as a result of stress of on the importance of board presenting a balanced and understandable assessment of the company’s position. The directors are required to explain their responsibilities for preparing accounts. Also expected are statements regarding the effectiveness of the internal controls of the company. The auditors are themselves, expected to take a proactive position in goading the management and the company to adopt better, transparent disclosure practices and expose wrong doings. All this sounds too ideal to be practiced, but effort have to be made in order to ensure that more Enrons don’t happen in the future. So better accounting standards are an essential pre-requisite for better corporate governance. In Asia and Latin America, there is a need for more fundamental disclosure of information and stronger shareholders rights. This is to avert debacles such as the Enron one. What has emerged as a result of these ideas is what are popularly known as ‘Generally Accepted Accounting Practices’ (GAAP). The US has its own version. The US version is based on the concept of ‘risk and return’, and to provide shareholders and other investors with overall professional management expertise and give management an opportunity to augment the financial statements with its own insights into what has happened to the company and what lies ahead. The notes are an integral part of the financial statements and are audited. They include a summary of significant accounting policies and additional information relating to specific accounts and transactions. Income tax expenses, long term leases, contingent liabilities, pensions, stock option plans and risk management.

2.2 INDIAN ACCOUNTING STANDARDS

In comparison, in India, ‘accounting standards’ means those standards which are recommended by Institute of Chartered Accountants of India and prescribed by the central government in consultation with the National Advisory Committee on Accounting standards.

Constitution of National Advisory Committee on Accunting Standards, (Section 210A)

“(1) Pursiant to the provisions of Section 210A of the Companies Act, 1961 the central government has constituted an advisory committee to be called the National Advisory Committee on Accounting Standards to advise the Central government on the formulation and laying down of accounting policies and accounting standards for adoption by companies or class of companies under this act.

(2) The Advisory Committee shall give its recommendations to the Central government on such matters of accounting policies and standards and auditing as may be reffered to it for advice form time to time.

(3) The members of the Advisory Committee shall hold office for such term as may be determined by the Central Government at the time of their appointment and any vacancy in the membership in the committee shall be filled by the central Government in the same manner as the member whose vacancy occurred was filed.

(4) The non official members of the Advisory Committee shall be entitled to such fees, traveling, conveyance and other allowances as are admissible to the officers of the Central Governemnt of the highest rank.”

The India GAAP has been drawn largely from International accounting standards. The RBI, in 2002,tried to push banks into adopting the USGAAP, in context of Non-performing assets. However, the road is long and bumpy. One must look at the contentious areas in corporate governance, in India: constitution of boards, separation of functions of chairman and chief executive, various committees, vigilant shareholders and higher standards and transparency and disclosure. Own assessment is as important as external assessment, and the company can only value the ideals enshrined in good corporate governance practice, if it improves from within.

2.3 KUMAR MANGALAM BIRLA REPORT(2000)

The Kumar Manglam Birla Committee in its report made recommendations regarding Accounting Standards and Financial Reporting in Indian companies. It stated that over time the financial reporting and accounting standards in India have been upgraded. This however is an ongoing process and we have to speedily move towards the adoption of international standards. This is very important from the angle of corporate governance.

They made the following mandatory suggestions which have since then been complied by the Indian companies:

1. The companies should be required to give consolidated accounts in respect of all its subsidiaries in which they hold 51 % or more of the share capital.

2. Equally in cases of companies with several businesses , it is important that financial reporting in respect of each product segment should be available to shareholders and the market to obtain a complete financial picture of the company.

2.4 NARESH CHANDRA COMITTEE REPORT(2002)

In India, the Ministry of Finance and Company Affairs of the Central Government was quick to constitute on 21st August, 2002 a high powered Committee to examine the Auditor-Company relationship and regulating auditors. Now, the Naresh Chandra Committee submitted it’s report to the Finance Minister on Monday the 23rd December,2002. In its report, the Naresh Chandra Committee has commented on the poor structure and composition of the Board of Directors of the Indian companies, scant fiduciary responsibility; poor disclosures and transparency; inadequate accounting and auditing standards ; the need for experts to go through thoroughly the nitty-gritty of transactions between companies, banks and financial institutions, capital markets etc. The Committee highlighted that in India companies need to follow very stringent guidelines on corporate governance and that sadly there is a wide gap between prescription and practice and the Committee pinpointed the adverse legal consequences because of which the defaulters almost always get away due to the web of inefficiency, corruption and the intricate dilatory legal system.. Thus, while corporate governance reforms in India far outstrips that of many other countries, the performance in this regard lags very much behind.

IMPORTANT RECOMMENDATIONS

AUDITOR-COMPANY RELATIONSHIP

On the Auditor-Company relationship, the Committee recommended that the propriety of auditors rendering non-audit services is a complex area which needs to be carefully dealt with , keeping in view the twin objectives of maintaining auditor’s independence and ensuring that clients get the benefit of efficient, high quality services.

Ø The Committee noted that an Auditor who depends upon a single audit client for sizeable portion of annual revenues, risks compromising his independence. The Committee therefore recommended prohibition of any direct financial interest I the audit client by the audit firm, its partners or members of the engagement team as well as their ‘direct ‘ relatives.

Ø With regard the definition of “direct relative” the Committee felt that a ‘direct relative’ be defined as the individual concerned , his or her spouse, dependent parents, children or dependent siblings and that the ‘term’ relative as defined under Schedule 1A of the Companies Act,1956 is too wide and needs to be rationalized for effective compliance.

Ø The Committee noted that already ICAI prohibits its members as auditing firms from offering services such as book-keeping, maintaining records and accounts, internal audit , designing any information system which is a subject of audit or internal audit, brokering, investment advisory and investment banking services.

ROTATION OF AUDITORS

With regard to the suggestions for rotation of auditors, the Committee considered the views of the two distinct schools of thought, and concluded that there is no conclusive proof of the gains while there is sufficient evidence of the risks, and hence the Committee did not recommend any statutory rotation of audit firms, but expressed itself in favor of compulsory rotation of audit partners. On the issue of compulsory Audit Partner Rotation, the Committee recommended that the partners and at least 50 percent of the engagement team ( excluding article clerks and trainees) responsible for the audit of either a listed company , or companies whose paid up capital and free reserves exceeds Rs.10 crores, or companies whose turn over exceeds Rs. 50 cores, should be rotated every five years and that persons who are compulsorily rotated could, if need be, allowed to return after a break of three years.

DISCOSURES BY AUDITORS

The guidance “When in doubt, disclose” is probably the simplest and best yardstick for evaluating good corporate governance. The Committee felt that while amendments to the Companies Act, clause 49 of the Listing Agreement and other regulations laid down by SEBI and D.C.A have significantly enhanced disclosures in recent times, more can be done in the interests of the shareholders, other investors, stakeholders and the community at large without diluting the flexibility of needed managerial initiative. Hence, the Committee recommended that Auditors should disclose implications of contingent liabilities so that the investors and shareholders get a clear idea of a company’s contingent liabilities because these may be significant risk factors that could adversely affect the corporation’s future health. The following recommendation was put forward:

Ø Management should provide a clear description in plain English of each material liability and its risks. This should be followed by the auditor’s clearly worded comments on the management view and highlighted in the significant accounting policies and notes on accounts as well as in the auditor’s report, where necessary.

AUDITOR’S REPLACEMENT

With regard to the replacement of the auditors by the management of a company, the Committee felt that corporate governance would benefit from disclosing the reasons for the replacement. The Committee felt that if the management were to be more accountable to the shareholders and the audit committee, in the matter of replacing auditors, this is likely to make the auditors more fearless.

Ø Section 225 of the Companies Act needs to be amended to require a special resolution of shareholders in case an auditor, while being eligible to reappointment, is sought to be replaced and that the explanatory statement accompanying such a special resolution must disclose the management’s reasons for such a replacement, on which the outgoing auditor shall have the right to comment. The Audit Committee will have to verify that this explanatory statement is ‘true and fair’.

AUDITOR’S ANNUAL CERTIFICATION OF INDEPENDENCE

Before agreeing to be appointed, the audit firm must submit a certificate of independence to the Audit Committee or the Board of Directors of the client company to the effect that (I) the firm together with the consulting and specialized services affiliates, subsidiaries and associate companies are independent and have an arm’s length relationship with the client company. It should also be stated that the firm has not engaged in any non audit services and are not disqualified from audit assignment.

In the event of any inadvertent violations, the audit firm should bring these to the notice of the Audit Committee or the board, which will take prompt action to address the cause of violations and restore independence at the earliest.

APPOINTMENT OF AUDITORS

The Audit Committee should be the first point of reference regarding appointment of auditors. To discharge this fiduciary responsibility, the Committee should discuss the annual work programmed, review the independence of the audit firm and recommend to the Board, with reasons, the appointment, re-appointment and removal of the external director, along with the annual audit remuneration. Government companies may be exempted from this requirement.

AUDITING OF AUDITORS

There should be established , with legislative support, three independent Quality Review Boards (QRB) one each for the ICAI, ICSI and the ICWAI to periodically examine and review the quality of audit, secretarial and cost accounting firms and pass judgments and comments on the quality and sufficiency of systems, infrastructure and practices. The composition of the Committee and other details are also dealt with by the Committee in its report.

There has also been a recommendation by the Committee about the certification of the Annual Audited Accounts by the CEO and the CFO of the company, in the case of all listed companies and also the public limited companies whose paid up capital and free reserves exceeds Rs.10 cores or turnover of Rs. 50 cores.

The Committee also recommended better co-ordination between DCA and SEBI harmonizing the regulatory functions of SEBI and DCA. In this connection, the Committee has recommended that wherever possible, SEBI may refrain from exercising powers of subordinate legislation in areas where specific legislation exists as in the Companies Act, 1956.

CORPORATE SERIOUS FRAUD OFFICE

The Committee also suggested setting up a Corporate Serious Fraud Office (CSFO), without, at this stage, taking away the powers of investigation and prosecution from existing agencies, for detecting frauds committed by the companies. A Corporate Serious Fraud Office should be set up in the Department of the Company Affairs with specialists induced on the basis of transfer/ deputation and on special term contracts. This should be in the form of a multi-disciplinary team that not only uncovers the fraud, but is able to direct and supervise prosecutions under various economic legislations through appropriate agencies. Such an office has since then been set up in the Department of Company Affairs.

The Committee also recommended a number of other steps that it feels would contribute to better corporate governance regime. Broadly, these cover areas such as preventing stripping of assets, random scrutiny of accounts, better training for articles, and propagation of an n internal code of ethics for companies. It has also stressed on the need for strengthening the DA and ROC infrastructure.

COMPANIES AMENDMENT BILL,2003

A close look at the amendments proposed in the Bill reveals that the changes proposed are based on the recommendations made by the Naresh Chandra Committee and Aryan Murthy Committee(which is discussed below) . In particular, clauses 99,102,104,107,112,118,119,132,136,137,15,157 and 174 of the Amendment Bill can be traced to the recommendations of the Naresh Chandra Committee.

But the practical aspect of this bill has a different story to tell. The Bill has been sent back to the Department of Company Affairs twice by the Rajya Sabha for some or the other changes. Moreover, the provision reserving a seat for women on the board of directors was proposed to be dropped completely. Regarding the clause on retirement for directors at 75 was not dropped altogether. It has been mentioned quite often in the media that the Corporate Sector had been lobbying hard since the introduction of the Bill in the Rajya Sabha in May this year for significant dilution of several provisions , it described as “draconian”.

2.6 NARAYAN MURTHY COMMITTEE REPORT(2003)

SEBI constituted a Committee on Corporate Governance under the Chairmanship of Shri N.R. Narayan Murthy, The Chief Mentor of INFOSYS Technologies. The Committee included representatives from the Stock Exchanges, Chambers of Commerce and Industry, investor institutions and Professional bodies and debated on key issues and made recommendations. The Narayan Murthy Committee submitted its report to the Department of Company Affairs on the 8th February,2003.

IMPORTANT RECOMMENDATIONS

Following are some of the main recommendations of the Narayan Murthy Committee :-

Role of the Audit Committee

Audit Committee of public listed companies should be required to review the following information mandatory :-

Ø Financial statements and draft audit report including quarterly and half yearly financial information

Ø Management discussion and analysis of financial condition and results of operations.

Ø Reports relating to compliance with laws and to risk management.

Ø Management letters and letters of internal control weaknesses issued by statutory/ internal auditors

Ø Records of related party transactions

Ø All members of the audit committee should be “financially literate” and atleast one member should have accounting or related financial management expertise.

Explanation 2: A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting or requisite professional certification in accounting or any other comparable experience or background, which results in the individual ‘s financial sophistication, including being or having been a chief executive officer or chief financial officer or other senior executive with financial oversight responsibilities.

PROCEEDS FROM INITIAL PUBLIC OFERINGS(IPOs)

The Narayan Murthy Committee has recommended that companies raising money though an IPO should disclose to the Audit Committee, the uses, application of funds by the major category( capital expenditure, sales and marketing working capital etc) on a quarterly basis. On an annual basis, the company shall prepare a statement of funds utilized for the purposes other than those stated in the offer documents. This statement should be certified by independent auditors of the company. The audit committee should make appropriate recommendations to take steps in this regard.

The Government needs to provide for the above as a part of the role and functions of the audit committee under section 292A as proposed in the bill .

CODE OF CONDUCT FOR THE BOARD

The Committee has recommended that it should be obligatory for the Board of a company to lay down a code of conduct for the Board members and senior management of the company. This code of conduct shall be posed on the website of the company. All Board members and senior management shall affirm compliance with the code on an annual basis. The annual report of the company should contain a declaration to this effect signed by the CEO and the COO.

This recommendation can be made applicable to the companies meeting the parameter stipulated by the Naresh Chandra Committee viz. to public companies whose networth exceeds Rs. 10 cores or whose turnover exceeds Rs.50 cores. The Government needs to make suitable amendments in section 217 pertaining to the Directors Report so as to incorporate the above aspect of compliance with the code of the conduct.

3. EMERGING TRENDS

With so much said, one wonders how much is actually being done. Corporate Governance has as many critics as it has proponents. There is a sweeping tendency amongst many, to feel that all this is quite futile, as in practice, nothing concrete has been done. In the meantime, the recommendations of the Naresh Chandra Committee report found their acceptance in the form of Companies (Amendment) Bill, 2003 which was introduced in the Parliament in May, 2003. The bill is yet to see the light of day, in the form of an Act. At the end of the day, the facts point out to the conclusion that Corporate Governance, the new Buzzword, has remained a buzzword and failed to gain any kind of substance. The following point to this:

(a) As per the observations made by the Advisory committee of the RBI: “A distinguishing feature of the Indian Diaspora is the implicit acceptance that corporate entities belong to founding families”, “In the Indian Scenario the promoters dominate governance in every possible way”;

(b) The Securities scam of 2002 which followed the same Modus Operandi as the 1992 scam, exposed the hollowness and shallowness of surveillance and enforcement of the Companies Act, 1956.

(c) The total amount of money duped by the vanishing companies was something to the tune of Rs. 66861 cores.

(d) Non-performing assets of scheduled commercial banks amounted to Rs. 58, 554 as on 31st March, 1999

(e) AS per Transparency International Corruption Index, India ranks as 69th out of 70 countries.

The reasons for this are various. One of the primary reasons, is the indelible nexus between politics and Corporate Affairs. As one critic has put it, “political Hobnobbing”. The Board of Directors are virtually omnipotent in corporate affairs. Prosperity is necessarily the first theme of every political campaign. This nexus is against the fabric of Corporate Governance. The Board of Directors can pass certain portions of the profits as political donations. Although an absolute ban on such practices was mandated a long time ago, the practice continues unabated. One suggestion, to curb such practice, is develop an in-house mechanism to sterilize directors.

3.1 FUTURE PREDICTIONS

Excessive regulation stifles innovation and growth, that is also a major risk. Shareholder activism needs to be encouraged, or at least not stifled. They are the nest check on fraudulent practices of managers and directors. Regulation may have to be tightened, if a scam is sensed, but they can always be rolled back or slackened. As regards the pressure on managers. They should consult the board, as often as they have to in order to fully apprise themselves of the pros and cons of any strategy. The board members, in return, should ensure free space to executive management. The board members should lead by example. They must set the benchmarks of professionalism and ethics, to be followed in the company. If they can’t keep up with the pace of the dynamic business environment, then they should quite gracefully. The art of Corporate governance lies in establishing convergence between interests of managers and other stakeholders and selecting boards that provide this crucial link, ensuring that managers do not abuse their authority nor feel cramped to such an extent that they feel rusted. As one author has aptly put it “if corporate governance is practiced, like fidelity in marriage with the sole objective of not being caught while cheating, the clearly, it would remain as rocky as a marriage”. So a voluntary effort is the need of the hour. It’s a myth to think and believe that ‘we are only like that’, this attitude must be overcome. Integrity and honesty never go un-rewarded, so patience and perseverance are very important. Intense competition and globalization has its plus points too. It has helped improve the position of investors and has helped push the National Stock markets to new highs, never experienced before. The government has taken bold steps to upgrade the Indian investment environment to global standards.

3.3 QUESTION OF ETHICS AND MORALITY

Gandhian Philosophy has impressed upon that business and ethics are not opposed but go together. In business one can earn as much as he likes, but as a ethical command, one cant spend as much as one likes. Now, members of the Board are rated as governors of the company. They have to raise themselves above the personal urge and aptitude. When the corporate governance, by their governors attains impersonal charactors, accountability and transparency would obviously persist as most natural and perrenial feature. No extra venture would be necessary. The Statute though empowered, exercise thereof by the governors of the company need to be in the supreme interest of corporate governance. That interest also comprehends corporate ethics and morality. His could be accomplished with singular dedication and determination of the governors to the ideals of corporate governance.

How to fine tune the corporate governance with the needs of competitive business environment that requires speed of decision making and nimbleness ? Corporate Governance has to be designed to oversee such managers without impairing managerial effectiveness. This is the manager’s side of the story. How to arrest the process of deterioration of first rate managers into corporate fraudsters ? This is the investor side of the story. The best resolution of these issues consists perhaps in redefining business goals in such a manner that businesses become socially more relevant.

4. CONCLUSION

“That government is best which governs the least, because its people discipline themselves.”

-Thomas Jefferson

Effectiveness of a system of corporate governance cannot be legislated by law nor can any system of corporate governance be static. In an energetic and lively environment, systems of corporate governance need to be continually evolved. The Narayan Murthy committee believes that its recommendations raise standards of corporate governance and make them attractive for domestic and global capital. These recommendations can also form the base for further evolution of the structure of corporate governance in consonance with the rapidly changing economic and industrial environment of the country in the new millennium. One valuable suggestion, given by the Hampel Committee, but which holds just as good for India is that the boards should consider introducing procedures for assessing their own collective performance and that of the individual directors. A crucial consideration which must not be overlooked is that though the regulatory bodies have brought out various guidelines and rules to ensure corporate governance, it is largely an issue of ethic, and hence difficult to enforce. It must come from within the organisation.

Thus, corporate governance largely depends on the following: The quality of the promoters, the intentions of the promoters, the systems and procedures adopted, the transparency in the activities, and the quality of persons at the helm of day-to-day affairs. Every person associated with the company must appreciate the need for corporate governance, which cannot be achieved by merely asking the company to do various things. Corporate governance is a self-regulation and cannot be imposed.