Q 2 What is corporate governance? What is the current state of implementation of corporate
governance practice in India?
Ans.
Corporate governance is about maximizing shareholder value legally, ethically and on a sustainable
basis, while ensuring fairness to every stakeholder – the Company’s customers, employees,
investors vendor-partners, the government of the land and the community. Thus, corporate
governance is a reflection of a Company’s culture, policies, its relationship with the stakeholders,
and its commitment to values.
Corporate governance had its origins in the 19th century, arising in response to the separation of
ownership and control following the formation of joint stock companies. The owners or shareholders
of these companies, who were not involved in day-to-day operational issues, required assurances
that those in control of the Company, the directors and managers, were safeguarding their
investments and accurately reporting the financial outcome of their business activities. Thus,
shareholders were the original focus of corporate governance.
"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, and spells out the rules and procedures for making decisions on corporate affairs. By
doing this, it also provides the structure through which the company objectives are set, and the
means of attaining those objectives and monitoring performance"
"Corporate governance - which can be defined narrowly as the relationship of a company to its
shareholders or, more broadly, as its relationship to society
"Corporate governance is about promoting corporate fairness, transparency and accountability"
Indian Scenario
In India, the industry, rather than the government, provided the initial impetus for corporate
governance reform. Driven by a desire to make Indian businesses more competitive and respected
globally, the Confederation of Indian Industries (CII) published a voluntary Code of Corporate
Governance in 1998, one of the first major codes in Asia. The Securities and Exchange Board of
India (SEBI) followed by setting up the Kumar Mangalam Birla Committee on Corporate
Governance. The recommendations of the committee in December 1999 formed the basis for Clause
49 of the Listing Agreement.
In addition, the Department of Company Affairs, Government of India, constituted a nine-member
committee under the chairmanship of Mr. Naresh Chandra, former Indian ambassador to the U.S.,
to examine various corporate governance issues.
SEBI instituted a committee under the chairmanship of Mr. N. R. Narayana Murthy in 2004 which
recommended enhancements in corporate governance. SEBI has incorporated the recommendations
made by the Narayana Murthy Committee on Corporate Governance report in Clause 49 of the
Listing Agreement. The revised Clause 49 was made effective from January 1, 2006.
Details on Indian Scenario
The CII Code
More than a year before the onset of the Asian crisis, CII set up a committee to examine corporate
governance issues, and recommend a voluntary code of best practices. The committee was driven by
the conviction that good corporate governance was essential for Indian companies to access
domestic as well as global capital at competitive rates. The code was voluntary, contained detailed
provisions, and focused on listed companies.
Kumar Mangalam Birla committee report and Clause 49
While the CII code was well-received and some progressive companies adopted it, it was felt that
under Indian conditions a statutory rather than a voluntary code would be more purposeful, and
meaningful. Consequently, the second major corporate governance initiative in the country was
undertaken by SEBI. In early 1999, it set up a committee under Kumar Mangalam Birla to promote
and raise the standards of good corporate governance. In early 2000, the SEBI board had accepted
and ratified key recommendations of this committee, and these were incorporated into Clause 49 of
the Listing Agreement of the Stock Exchanges.
The Naresh Chandra committee report on corporate governance
The Naresh Chandra committee was appointed in August 2002 by the Department of Company
Affairs (DCA) under the Ministry of Finance and Company Affairs to examine various corporate
governance issues. The committee submitted its report in December 2002. It made
recommendations in two key aspects of corporate governance: financial and non-financial
disclosures: and independent auditing and board oversight of management.
Narayana Murthy committee report on corporate governance
The fourth initiative on corporate governance in India is in the form of the recommendations of the
Narayana Murthy committee. The committee was set up by SEBI, under the chairmanship of Mr. N.
R. Narayana Murthy, to review Clause 49, and suggest measures to improve corporate governance
standards. Some of the major recommendations of the committee primarily related to audit
committees, audit reports, independent directors, related party transactions, risk management,
directorships and director compensation, codes of conduct and financial disclosures.
An important proposal which has been implemented is the mandatory portion on Corporate
Governance in the annual report of the company, with a detailed compliance report on Corporate
Governance. Non compliance of any mandatory requirement i.e. which is part of the listing
agreement with reasons there of and the extent to which the non-mandatory requirements have
been adopted should be specifically highlighted.
In addition, the company shall obtain a certificate from the auditors of the company regarding
compliance of conditions of corporate governance as stipulated in the clause and annexe the
certificate with the directors’ report, which is sent annually to all the shareholders of the company.
The same certificate shall also be sent to the Stock Exchanges along with the annual returns filed
by the company.
Whilst the issues promulgated by the various committees above caters for the various mandatory
requirement highlighted by Organisation for Economic Development and Growth (OECD),
implementation of the same in spirit has led a lot to be desired. Typical area of concern would be
the Annual report which requires confirmation on compliance to corporate governance, wherein it is
met today more as a statutory requirement than using to convey or increase investor confidence on
corporate governance.