Enactment of Concept of Corporate Governance

Introduction:

Why today world-over everybody is talking about good governance system. After all what is this word, why so much of importance is now being given to this word and what is the need to understand it, how to do the same etc. etc.?

Meaning of Corporate Governance:

The Institute of Company Secretaries of India0 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.

Experts at the Organisation of Economic Co-operation and Development (OECD) has defined corporate governance as the system by which business corporations are directed and controlled. According to them, 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, and spells out the rules and procedures for making decisions on corporate affairs. This definition seems to be consistent with the one presented by the Cadbury Committee.

Origin of Concept/ Seeds of Modern Corporate Governance:

a) Origin of concept of Corporate Governance in Countries out side india:

After the Watergate scandal in the United States (US), seeds of modern corporate governance were sown. As a result of subsequent investigations, the US regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions and to bribe Government officials.

The Enron debacle of 2001, involving the hand-in-glove relationship between the auditor and the corporate client, the scams involving the fall of the corporate giants in the U.S. like the World. Com, Quest, Global Crossing, Xerox, etc., shaked the confidence of people investing in corporations world.

This led to the enactment, in USA, of the Fraud and Corruption Practices Act, 1977, Sarbanes and Oxley Act (SOX) and raised widespread anxiety and concerns world over.  SOX made fundamental changes in virtually every aspect of Corporate Gover-nance in general and auditor s independ-ence, conflicts of interests, corporate respo-nsibilities, need for enhanced financial disclosures and severe penalties for wilful default by managers and auditors in particular. The names of Ivan Boesky, Michael Levine and Michael Milken also tossed up for Junk-Bond financed insider deals through Drexel Burnham & Lamberts.

A spate of scandals and financial collapses in UK also in late 1980s and early 1990s made the shareholders in companies and banks extremely anxious about their investments. These made the UK Government too jittery and, therefore, to prevent the recurrence of business failures, the Cadbury Committee was set up by London Stock Exchange in May 1991, inter alia, to assist in raising standard of corporate governance.

Similar practices were noticed in other countries also. During 1980s, many Australian companies, including Aland Bond & Lawire Connel of Rothewells were accused of questionable governance practices. Such practices surfaced in Japan too and charges concerning malpractice in governance were levelled against Nomura Securities and Recruit Corporation.

This radical concept of Corporate Governance originated in developed countries like the US and UK in the early nineties, its adoption in India has been restricted to a few multi-nationals, foreign banks and some financial institutions.

It is an accepted fact that the ethical governance of any enterprise of any country is now as important in the world economy as the Government of those countries. It is irrespective of the size of the organization as today the cluster of ancillaries and Small Medium Enterprise (SME s) plays as good role as a big or multinational organization.

b) Committees constituted by Countries for Corporate Governance:

Such incidents made almost all countries seriously anxious in regard to improvement in governance of companies. A number of Committees were appointed to study the problem of mis-governance and suggest ways and means to improve governance. Some details about such committees, besides Cadbury Committee (supra) are as under :

1. Greenbury Committee on Directors Remuneration, U.K. (1995);
2. Hampel Committee on Corporate Governance, U.K. (1998)
3. Combined Code of Governance of London Stock Exchange (UK)
4. The Business Roundtable (USA), 1997
5. The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committee, USA (1999)
6. California Public Employees Retirement System (CalPERS), USA
7. King s Committee on Corporate Governance, South Africa (1994)
8. Organization of Economic Cooperation and Development (OECD) Principles of Corporate Governance (1999)
9. CACG Guidelines Principles for Corporate Governance in the Commonwealth (1999)
10. Vienot Committee on Corporate Governance, France (1999)
11. Euroshareholders Corporate Governance Guidelines (2000)

c) Committees constituted by India:

India could not remain unaffected by such developments world over. Because of weak governance, a number of companies in Non-Banking Financial Sectors and various other fields failed, causing loss to a number of persons. Hence, a spate of committees and bodies were appointed to give recommendations to ensure improved corporate governance and for safeguarding the interest of stakeholders. The details about these are :

i. Kumar Mangalam Birla Committee - the first Committee, appointed by SEBI, to study and report about the Corporate Governance (1999);

ii. Department of Company Affairs appointed a Committee (popularly referred to as Naresh Chandra Committee (2003) with similar objectives in view.

iii. Narayana Murthy Committee appointed by SEBI (2003) [This Committee was appointed even while Naresh Chandra Committee was still at work]. This Committee re-visited the subject of corporate governance again after the initial report and approved its revised recommendations in December 2003.

iv. Besides the aforesaid 3 Committees, studies about Corporate Governance have also been made by the following :

v. Confederation of Indian Industries (CII) report on  Desirable Corporate Governance Code given in 1998.

vi.UTI s Code on Governance.

vii. Report given by Study Group on Corporate Excellence set up by the Department of Company Affairs (2000).

Reason for Corporate Fraud in India

Corporate mismanagement lead to scam “Reebok India” The governance and operations in the company were mismanaged. The bills were inflated and not recorded correctly. So, the probe clearly indicates that it was not a corporate scam in the apparel manufacturing firm but it was non-adherence to the rules and guidelines of business procedures in the firm.

Transparency in the Functioning of a Company:

“SATYAM” The board of directors of a company consists of the promoter directors and other members selected by the promoters, who may be their friends, solicitors or persons of eminence in their fields of activities and directors nominated by the financial institutions.

As stated above, the board meets once a quarter and usually four meetings are held in a year. The agenda for the board meeting is prepared by the Company Secretary in consultation with the managing director and approved by the chairman of the board. The same is sent to all the directors a few days in advance of the date of the meeting.

At the meeting, the discussions are related to the business contained in the agenda. If there are any other items of business not included in the agenda, the same are placed before the board with the permission of the chair-person. The discussions usually last from two to three hours. Thus, the directors, other than the promoter directors, come to know about the state of affairs of the company from the matters placed before the board. Thus, these directors do not have any other opportunity to know about the other matters of the company.

it is necessary to bring transparency in the functioning of a company. The board of directors, being the ultimate authority in the management of a company, should be able to understand the working of the company by interacting directly with the Heads of department of the company regularly before each board meeting.

Importance of Corporate Governance in India:

The concept of corporate governance in India gains importance from the following factors, which are proven and time-tested :

(a) It explains the need to adhere to ethical business practices.

(b) It stresses on the need to have transparency in respect of board matters, disclosures to shareholders and also emphasizes on the need to have an arms-length relationship between the promoters/owners and the managers.

(c) It smoothen the process of integration of India into the world economy, thereby enabling the Indian industry to play the game by a set standard of international rules rather than continue anachronistic practices.

(d) It ensures that promoters of a company remain perennially accountable and responsive to shareholders, creditors, consumers and employees.

(e) Corporate governance is a must, not only to gain credibility and trust but also as a part of strategic management for survival, consolidation and growth.

(f) Corporate governance strives to enhance board performance by emphasizing on the contributions of professionally qualified and experienced non-executive directors and board committees.

(g) Corporate governance strives to monitor and ensure absolute compliance with the laws of the land.

(h) The important characteristics of corporate governance, i.e., adequate disclosures, focused approach, streamlined delegation and professional management, ultimately result in maximizing the shareholder-value and protecting the interests of creditors and employees.

Indian corporate law strengthening provisions relating to Corporate Governance:

Secretarial Standards:

India is the first country to issue Secretarial Standards. These Secretarial Standard becomes international benchmark for Board and General Meetings for all the countries and benchmark for counterparts to follow. India Inc would wake a new benchmark of Secretarial Standards (SS) to foothold its corporate governance practice in the global arena. When India INC was facing multitude of Corporate Governance practices whereby two activities particularly Board and shareholders decision(s) are crucial, the introduction of SS pertaining to these areas is timely, apt and need of the hour.

SS will foster corporate governance and reduce litigation as the steps on how to conduct a Board Meeting and an General Meeting have been very clearly specified. The adoption of secretarial standard by the Corporates will have substantial impact on the quality of secretarial practice being followed by the Companies, making them comparable with the best practice in the world.

Good corporate governance involves a commitment of a Company to run its business in a legal, ethical and transparent manner and runs from the top and permeates throughout the organization.

Role of Independent Director:

There are no explicit provisions for independent directors under the six decade old Companies Act, 1956 and only clause 49 of the Listing Agreement prescribed for the induction of independent directors and made it mandatory for listed companies. Thereafter, the Ministry of Corporate Affairs carried out corresponding changes to the provisions of 1956 Act, in an attempt to include the requirement of having an independent director on the board of listed companies and selective unlisted public companies to oversee corporate governance under the new Companies Act, 2013.

The SATYAM EPISODE has created an environment leading to serious discussions on corporate governance and the role of independent directors therein. Many opinions have been expressed in seminars, newspapers, magazines as well as in private discussions. The main theme is the role of independent directors in corporate governance. Everyone  feels that the independent directors can deliver the goods and the misdeeds of the promoters can be prevented.

Clause 49 Listing Agreement:

In a step towards making listed companies more transparent and to align the provisions related to listing agreement with the Companies Act 2013, the Capital Markets Regulator, The Securities and Exchange Board of India (SEBI) has also now amended the Clause 49 of the Listing Agreement. The new Master Circular No. CIR/CFD/POLICY CELL/2/2014 dated 17.04.2014 will supersede all other earlier circulars issued by SEBI on Clause 49 of the Equity Listing Agreement.

Companies Act, 2013 raising Bar on Governance:

Companies Act, 2013 is a good step for the Corporate Governance. Many new provisions are introduced under Companies Act, 2013 for Corporate Governance like:

Increase Reporting Framework: New definition of Subsidiaries and Joint Ventures has been introduced, definition of financial year to uniform financial years, Consolidation of financial statement of subsidiary/associate Companies, regulations relating to depreciation has been changed, mandatory appointment of internal audit introduced.

Auditor accountability has been increased by restricting the no. of audits, by increasing the reporting responsibilities of Auditors.

Emphasis on investor protection: Provisions are introduced to make strong emphasis on investor protection by introducing provisions of related party transactions, Insider trading, oppression & mismanagement and Fraud risk Mitigation.

Wider directors and Management Responsibilities: Directors appointment provisions changed. There should be at least a resident director; some specified Companies required to appoint Women Director, independent Director. Specified Companies required constituting Audit Committee and Nomination & Remuneration Committee.

Duties of Directors are introduced, responsibility of Independent Director is introduced, content of director’s Report changed.

Suggestions for good Corporate Governance

If we really desire good corporate governance by our Companies, it is necessary that the companies should follow genuine principles of transparency, good ethics and create confidence in all the stakeholders.

Keeping the above in view, the following suggestions are offered :

(i) The Companies Act should lay down a broad frame work for the Board Agenda which, inter alia, should cover the following areas :

Financial Position of the Company: Particulars of equity/preference paid-up capital, loans from the financial institutions/banks, deposits from the public, any overdue installment of loan, interest thereon, repayment of fixed deposits, payment of employees and employer's share of contribution to the provident fund remaining unpaid with the reasons therefore, dividends declared and paid and outstanding, amount due to the creditors for supplies made or services rendered to the company, amount overdue from the debtors and reasons for non-realization of the same and any other monetary matters.

Production/sales/stock on hand and significant variation of the actual from the budgeted levels, reasons for reduction in production and sales, if any.

Human resources policies, employees relationships both at the Head Office and branches as well in the company s factories, appointment and separation of senior level employees.

Any notices of violation of laws received from the Government authorities, local administrations, tax authorities and the company s reply to them.

(ii) At each Board Meeting the following certificates should be placed before the board:

A certificate to the effect that all payments due to the Government, local authorities, financial institutions, depositors, creditors, employees, and others have been paid on or before the due dates. If there is any default, the reasons for the same and the actions to rectify the same should be clearly stated.

The company secretary shall furnish a certificate to the board that the Company has complied with all the legal requirements. If there is any default in such compliance, reasons for the same and action taken to rectify the same should be clearly mentioned.

If the company has received any notices from the Government or other authorities, it should place the same before the board and appraise the board about the action taken.

Both the above certificates should be counter-signed by the managing director.

(iii) Minutes of the board meetings should be promptly sent to all the directors after the same are approved by the chairman.

It is observed that in some companies, the agenda papers of the board meeting are collected back at the conclusion of the meeting. The minutes of the board meeting of such companies are not sent to the directors. Such unhealthy practices should be stopped forthwith.

By the Secretarial Standard issued by the Institute of Company Secretaries of India step has already been taken for this point. As per Secretarial Standards Company need to send Agenda, Notes to Agenda and draft resolution atleast 7 days before the meeting to all the Directors and Draft of Minutes and final signed & certified copy of the Minutes of the Meeting to all the Directors.