Corporate Governance: Lessons from the Past and Challenges Ahead


By

Mrs. Vineeta Agrawal
Lecturer
KIIT College of Engineering
Gurgaon
 


ABSTRACT

No research agency, consulting firm ever predicted the collapse of Banking system world-wide but it took place in such a vehement manner. Would the jury of Golden Peacock Award ever thought that after three months of handling the Award For Corporate Excellence to 'Satyam' they would have to deal with its bankruptcy and bail-out issues?. The answer to these questions is a clear no. why all the authorities raised the question of transparency and corporate governance as practiced by companies? This paper tries to explore the existing framework and code of corporate governance in India and what challenges lie ahead for the corporate world in India.

Introduction

James D. Wolfensohn, the incumbent President of the World Bank made the following observations about the significance of corporate governance: "The Governance of the corporation is now as important in the world economy as the Governance of countries". This statement clearly point out the increasing importance of corporate-governance world-wide. The issue of governance, accountability by management and transparency in the affairs of the company as well as about the right of stakeholders and the role of Board of Directors has never been as prominent as it is today. The corporate governance has now acquired a prominent issue in the corporate discussions.

Corporate Governance is concerned with direction and control of corporate bodies. These activities are much more basic as compared to performance and profitability. Performance or Profitability may be a goal but Corporate Governance is a path, is a roadmap to success. They lay the foundation for the future growth of the company. In the words of Infosys Chairman of the Board and Chief Mentor N.R.Narayan Murthy "The primary purpose of corporate leadership is to create wealth legally and ethically. This translates to bringing a high level of satisfaction to five constituencies- Customers, Employees, Investors, Vendors and society at large." The raison d'ętre of every corporate body is to ensure predictability, sustainability and profitability of returns year after year."

Indian entrepreneurs and business enterprises have a long tradition of working within the values that have defined our nation's character for millennia. India's ancient wisdom, which is still relevant today, inspires people to work for the larger objective of the well-being of all stakeholders. These sound and all-encompassing values are even more relevant in current times, as organizations struggle with the challenges of modern-day enterprise, the increasing aspirations of stakeholders and of citizens eager to be active participants in economic growth and development.

Corporate governance was almost a non-existing issue for developing countries of the world till late nineties. It remained virtually invisible in these countries until the East-Asian financial crisis of 1997-98 drew attention to the problem of capitalism and their perceived relationship to poor local corporate governance practices in several major emerging market economies. Indian Corporates are now realizing these issues as they see a greener pasture of customers and funds oversees. Now they have understood the fact that long-term survival is only possible with being correct all the time and it is about following Good Corporate Governance Practices

Corporate Fiascos: Lessons from the West

If there is one lesson that can be learnt from the corporate scandals at Enron, WorldCom, Global Crossing, Marconi, Equitable Life, Parmalat, Skandia, Vivendi and now Shell, it is to move away from the just filling formalities. Enron was far better on all the formalities required by code of Corporate Governance. More than 50 per cent of its directors were independent. The chairman of its audit committee was a person of irreproachable reputation as Dean of Stanford Business School.

It was declared "the most innovative company" by Fortune for five successive years. McKinsey was consultant to Enron and collected fees of $ 10 million a year. It had top ratings from every rating agency until days before filing for chapter 11. The story repeats itself verbatim in almost all the subsequent investigations.

Lynn Turner, chief accountant of SEC from 1998-2001, who was earlier a partner of Cooper & Lybrand, admitted in a TV interview, "All Big Five accounting firms helped Wall Street investment banking firms to engineer hypothetical transactions to make companies look better than they actually were." These examples are enough to prove that the companies getting listed at the top position in the Fortune 500 are pursuing what kind of practices.

The great set back in Indian corporate world

The scene is not very different in the case of Indian Companies as well. What transpired in Satyam Computers in January culminating into the historic confession letter of former chairman B. Ramalinga Raju, admitting a fraud of Rs 78 billion has caused the regulators and the investors everywhere to re-examine the corporate governance standards. The multibillion dollar scam is unprecedented and idiosyncratic for more than one reason. The fact that company which was audited by one of the most prestigious audit firms and adopted most advanced accounting and transparent IFRS accounting systems much ahead of time can penetrate such a colossal and a global fraud is clearly eye opening for corporate counsel worldwide.

SEBI chairman C.B.Bhave when asked about the future course by SEBI he clearly said that this is neither the first nor the last corporate scandal in India. It clearly refers to the point cautious approach is required at every step and it again highlights the fact that corporate governance is a path not an end.

Problem in Indian Corporate Climate-

1- No for clear demarcation of controls - The current regulatory framework dealing with corporate issues which comprises of Ministry of Corporate Affairs (MCA), Security and Exchange Board of India (SEBI) and Stock Exchanges, without clear demarcations lead to overlapping of controls and enables violators go off the hooks. This is the reason why N.K.Mitra Committee recommended that SEBI alone should be the capital market regulator.

2- Lack of Professionalism of Top Executives - It is very common practice for Top Executives to act according to their gut feeling and many times ruining the investor's money.

3- Role of institutional Investors- Institutional investors acting in a fiduciary manner for the foreign investors should be encouraged to form a comprehensive corporate governance policy.

4- The corporate governance reforms have mostly been on paper. The hollowness of the system is indicated by the fact that the 'independent directors' are all nominated by the controlling group whom they are supposed to supervise. Most directors of the company do not consider it necessary to update their knowledge and understanding of changes in law and regulation or the business model of the company of which are directors and which affect their duties and responsibilities as directors. Refusal to approve or object to any proposal of management is considered bad manners.

5- Obliging Auditors- They help the company in window-dressing, manipulation of Profit and Loss Account, hedging and fudging of unexplainable expenditure and resorting to continuous upward evaluation of assets to conceal poor performance. Most of the MNCs due to their distrust on Indian auditors insist on the auditors of their parent company.

6- India has still a poor bankruptcy law and procedures. As per the Transparency International Corruption Perception Index 2009 India's position is 84th in the whole world.

7- Indian accounting standards still do not dominate consolidation – although this is slated to change.

8- Indian stock market are still inefficiently run and do not have adequate width or depth to give shareholder greater comfort.

9- Indian bond market is not yet very developed and Mutual Funds need to be a lot more professional.
 

--> Article continued on next page, click here  -->

Source: E-mail June 2, 2011

          

Articles No. 1-99 / Articles No. 100-199 / Articles No. 200-299 / Articles No. 300-399 / Articles No. 400-499/ Articles No. 500-599
Articles No. 600-699 / Articles No. 700-799 / Articles No. 800-899 / Articles No. 900-1000 / Articles No. 1001-1100
Articles No. 1101-1200 / Articles No. 1201-1300 / Articles No. 1301 Onward / Faculty Column Main Page