Corporate Governance and its Significance

1.1. Introduction:

Corporate governance is a key element in enhancing investor confidence, promoting competitiveness and ultimately improving economic growth. Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.[1] It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

In other words it is ranging from managing and maintaining operational transparency to something as simple as following legal mandatory disclosure norms. A good corporate governance mechanism improves the health of the corporate sector, thus enhancing national competitiveness.

1.2. Corporate Governance in today’s context:

According to Milton Friedam, “corporate governance is to conduct the business in accordance with owner’s or shareholders desires, which generally will be to make as much money as possible” but this context is based on marked maximization that underpins shareholder capitalism. But this context was further expanded by J.Wolfensohn, president, World Bank, has said that “corporate governance is about promoting corporate fairness, transparency and accountability.[2]

Even the Experts at Organization of Economic Co-Operation and Development (OECD) have defined “corporate governance” as the system by which business corporations are directed and controlled, it means according to them it is a structure which specifies the distribution of rights and responsibilities among different participants in the corporation.[3]

But today the concept of corporate governance has taken a new dimension and it runs as follows, “Corporate governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”.[4]

1.3. Corporate Governance in India:

From the beginning of 1980s, situations have changed in India. There have been wide-ranging changes has taken place in both the laws and the regulations in the field of corporate law and the capital market. As a result of several scams in India[5] a need has arisen to bring reforms, in response to that, reforms began in 1991 in India. The most important event in the field of investor protection in India was the establishment of Securities and Exchange Board of India (SEBI) in 1992.

In India, the Confederation of Indian Industry (CII) took the lead in framing a desirable code of corporate governance in April 1998.  This was followed by the recommendation of the Kumar Mangalam Birla Committee on corporate governance appointed by the SEBI in the year 1997.The introduction of Clause 49[6]  in Listing Agreements  in the year 2000 by SEBI was a major turning point in the history of corporate governance in India.

In the Report of SEBI committee (India) on Corporate Governance defines corporate governance as, the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders[7].The recommendations of the committee were enshrined in clause 49 of the Listing Agreement of every Indian Stock Exchange.[8] Every Company which has opted to list its shares in the recognized Stock Exchanges should enter into a listing agreement and non-compliance of the terms and conditions of the agreement can lead to a stringent action by the Stock Exchanges like de-listing of shares.

1.4. CLAUSE 49 OF LISTING AGREEMENT:

Clause 49 of the listing agreement to be entered into by the listed companies with the Stock Exchanges refers to certain conditions under the heading “Corporate Governance”. The said clause 49 mandates various conditions to be complied with by the Companies under the head “Corporate Governance”. Thus, it is specific to the Listed Public Companies though the word “Corporate Governance” is used in general and as a synonymous to “Good Governance”. An important decision taken in this regard in India is that all listed companies should have 50% independent directors in their board.

The listing agreement to be complied with by all the listed companies, though lists out many conditions, clause 49 occupies significance. Clause 49 of the listing agreement emphasizes on executive directors, composition of directors, independent directors, disclosures by non-executive directors and their compensation, provisions as to committees like Audit Committee, Code of Conduct, some additional disclosures, CFO/CEO[9] certification and a report on Corporate Governance etc.[10]The logic behind the further conditions on the listed companies under clause 49 of the listing agreement is just a further effort to eliminate the loopholes and for the protection of investors/shareholders.[11]

In 2002, the Naresh Chandra Committee on corporate audit and governance submitted its Report. Subsequently, in order to review the existing corporate governance code, SEBI constituted the Narayana Murthy Committee based on whose recommendations made in 2003, far-reaching changes were made in the Listing Agreement in 2004. The Ministry of Corporate Affairs also constituted an Expert Committee on Company Law under the chairmanship of Dr. J J Irani which released its Report in May 2005.

As per the revised clause 49 of the listing agreement based on the Narayana Murthy Committee ,  the companies are required to submit a quarterly report to the stock exchange within 15 days from the end of every quarter. The report should be signed by the compliance officer or CEO of the company. This revised clause is not applicable to mutual funds. The stock exchange should see whether the company has fulfilled all the provisions of the revised clause 49 like whether it has set up its Board and constituted committees such as, audit committee, investor grievance committee etc before seeking in principle approval for listing.

Along with that the Stock Exchanges shall also  set up a separate monitoring cell with identified personnel to monitor the compliance with the provisions of the revised clause 49 on corporate governance. The cell, after receiving the quarterly compliance reports from the companies which are required to comply with the requirements of the revised clause 49, shall submit a consolidated compliance report to SEBI within 60 days from the end of each quarter. In the revised clause 49 it made mandatory that there should be a separate section on corporate governance in its annual report and its should obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance. The certificate along with the directors report to be sent annually to all the shareholders of the company.

1.5. WHISTLE BLOWER POLICY:

The SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy to further improve the standards of corporate governance in India. Basing on the committee report, SEBI vide its circular dated 26^th August 2003, has introduced some major amendments to Clause 49 of the Listing Agreement. One of the important amendments is the Whistle Blower Policy.[12] The main object of the Whistle Blower Policy is to detect frauds, irregularities and encouraging employees to come forward to Audit Committee.[13]The following are the main features of the “Whistle Blower Policy” they are:

i.   Personnel who observe an unethical or improper practice (not necessarily a violation of law) shall be able to approach the audit committee without necessarily informing their supervisors.

ii.  Companies shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars, etc.

iii. The employment and other personnel policies of the company shall contain provisions protecting "whistle blowers" from unfair termination and other unfair prejudicial employment practices.

iv. Company shall annually affirm that it has not denied any personnel access to the audit committee of the company (in respect of matters involving alleged misconduct) and that it has provided protection to "whistle blowers" from unfair termination and other unfair or prejudicial employment practices.

v.  Such affirmation shall form a part of the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report.

But the SEBI because of the pressures from different corporate sectors it has now made the Whistle Blower Policy a non-mandatory requirement, before such revise of Clause 49 of the listing agreement it was a mandatory requirement. This shows how the SEBI is still under the impact and within the clutches of the corporate field sectors.[14]

[1] http://www.articlesbase.com/ethics-articles/corporate-governancea-comparative-study-of-select-public-sector-and-private-sector-companies-in-india-868495.html

[2] Atul Mehrotra, CORPORATE LAWS/CORPORATE GOVERNANCE, SEBI,  SCL-Magazine, Vol-90,2009, p-152.

[3] Ibid.

[4] The above definition was given by the Institute of company Secretaries of India. And the same was used in SEBi , Vol-90, 2009,  SCL-Magazine, p-152.

[5] Harshad Mehta scam in 1992 and Ketan Parekh scam in 2001.

[6] Clause 49 of the Listing Agreement of SEBI requires the companies who are listed to comply with certain provisions relating to board of Directors, Audit Committee, subsidiary companies, disclosures, report on corporate governance and compliance..

[7] http://www.articlesbase.com/ethics-articles/corporate-governancea-comparative-study-of-select-public-sector-and-private-sector-companies-in-india-868495.html

[8] The above said clause was introduced by the SEBI in the year 2000.

[9] The latest change in law is that CEO and CFO are responsible for establishing, evaluating and monitoring the effectiveness of internal control over financial reporting and disclosure.SEBI , SCL-Magazine,Vol-90, p161.

[10] V.DURGA RAO,  “How to look at "Corporate Governance" - Indian Corporate Law”.http://www.articlesbase.com/corporate-articles/how-to-look-at-corporate-governance-indian-corporate-law-1684329.html  (February 17, 2010).

[11] B.Saritha, CORPORATE GOVERNANCE - ITS PRINCIPLES, PRACTICES & VALUES,http://www.articlesbase.com/corporate-articles/corporate-governance-its-principles-practices-values-1045065.html (February 17 ,2010).

[12] http://www.domain-b.com/investments/markets/sebi/20031216_policy.htm

[13] http://www.financialexpress.com/news/whistle-blower-policy-a-mere-policy/59288/

[14] http://www.financialexpress.com/news/sebi-relaxes-reporting-norms-for-listed-firms/117852/