India: Vying for Global Benchmarks in Corporate Governance

Companies that provide good governance, both in terms of practices and results can expect the backing not only of investors but of customers too.

Ask Y.H. Malegham, Managing Partner, S.B. Billimoria about good governance and he’ll say, “Good governance means that the board agrees to being accountable to the shareholder, and as a result takes responsibility of directing and controlling the management.” K.N. Mamani, the Chairman of Ernst & Young India is of the view that “Today, corporate governance is being touted the way quality and core competence were”.

Recognising the changes in corporate governance, N.R. Narayana Murthy, CEO, Infosys Technologies says, “Investors, customers, employees, and vendors are all demanding greater transparency and fairness in dealings”.

Keeping everyone happy is not that easy for a corporate house. To attract and retain the commitment of investors, customers, partners, competitors and employees, a corporation has to match the global standards of corporate governance. The market forces in the new millennium highlight the virtues of an open, transparent and a merit-based management, which can only be achieved through sound corporate governance practices.

What is Corporate Governance?

Although there is no single acceptable definition of corporate governance, it can be said to be a means to maximise the long-term shareholder value in a legal and ethical manner, ensuring fairness, courtesy and dignity in all transactions of the company.

A few Indian companies have taken the initiative to establish good corporate governance, however a large number of them still do not pay much attention to it. To address this issue, a committee on corporate governance was set up on 7th May 1999 by the Securities and Exchange Board of India (SEBI) under the Chairmanship of Shri Kumaramangalam Birla to promote and raise the standards of corporate governance. The committee recently tabled its recommendations. The onus is now on SEBI to translate the preaching of the committee into practice.

This article provides an insight into how Indian corporates are vying for a corporate governance model that can meet global benchmarks.

Empower the Board
The most important task of any board is to ensure that the firm’s strategies and operations are directed to maximise shareholder’s wealth. This calls for the board to desist from imposing their personal will on issues relating to the management of the company. In the G.P. Goneka Group, the owner-chairman G.P. Goneka has created a supervisory board that has the final word on the affairs of the group’s companies. The owner-chairman too, is also bound by the board and has no power to overrule its decisions.

Have an appropriate mix in the Board
CII recommends that atleast 30% of the board should consist of outsiders if the chairman is one of them. If the chairman is an insider then 50% of the board should consist of non-executive directors. However, the major emphasis is to have directors who have a thorough understanding of the business, the market and the needs of the company. When Infosys realised that its major business would come from overseas, the company selected 4 non-executive directors who were very familiar with the global market. A mix of specialists in all functional areas and international trade specific to the company would ensure good governance.

Ensure that the board is aware of its functions

As per law, the board is responsible for decision related to borrowing, lending, investing and maintenance, dividends and accounts, though good governance goes beyond that. The boards’ contributions are needed to ensure customer satisfaction, employee satisfaction, succession, planning, financial prudence, a culture of performance and the protection of society and the environment. At HLL, the board meets atleast 10 times a year and examines issues that fit between innovation and strategy, brand statements and customer requirements.

Companies like BSES (Bombay Suburban Electricity Supply) are trying to have board meetings using audio-video conferencing and the net to improve interaction. Infosys, for example, has created a self-appraisal system that evaluates the contribution of members and recommends their re-appointment to shareholders.

Make use of the Sub Committee

Ensure conformance to both the letter and the spirit of the law, transparency, honesty and fair play in financial practices and disclosures. This can be done by setting up an audit committee with atleast 3 members.

ITC has carved 5 focused committees out of the board members. They have a committee for audit, compensation, nominations, shares and debentures, legal and safety. At Indian Aluminium, an audit committee that consists of 4 non-executive directors deals with issues related to accounting, financial reporting and internal control.

Provide Transparency

Transparency is the basis for corporate governance. A good corporate governance model ensures fairness, courtesy and dignity in all transactions within and outside the company. Indian disclosure norms presently being inadequate, directors should benchmark international standards such as US GAAP.

Corporate governance also addresses issues of insider trading. It is very important that directors who have inside information of the company should not use it to unfair disadvantage of the uninformed stockholders. This calls for companies to devise an internal procedure for adequate and timely disclosures, reporting requirements, confidentiality norms and code of conduct for its directors and employees with regard to their dealings in securities.

Nicolas Piramal, as a part of its good corporate governance, revealed its debt-profile in the Asian countries after investors were worried about its exposures in the crisis-ridden economies during the “Asian flu.”

Conclusion

To conclude, it can be said that companies that provide not only good performance but also good governance can expect the backing not only of shareholders but also of all stakeholders.

Related Reading:

“The Well-Governed Corporation”, Businesstoday, 7th November 1999