Corporate Governance in India | Business

In this article we will discuss about Corporate Governance in India:- 1. Liberalisation’s Impact on Corporate Governance 2. Investment and Governance 3. Ethical, Legal and Administrative Framework 4. Globalisation and the Convergence.

Liberalisation’s Impact on Corporate Governance:

The word ‘corporate governance’ has become a buzzword these days because of two factors. The first is that after the collapse of the Soviet Union and the end of the cold war in 1990, it has become the conventional wisdom all over the world that market dynamics must prevail in economic matters. The concept of government controlling the commanding heights of the economy has been given up. This, in turn, has made the market the most decisive factor in settling economic issues.

This has also coincided with the thrust given to globalisation because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalisation involves the movement of four economic parameters namely, physical capital in terms of plant and machinery, financial capital in terms of money invested in capital markets or in FDI, technology, and labour moving across national borders.

The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village.

Investment and Governance:

When investments take place in emerging markets, the investors want to be sure that not only are the capital markets on enterprises with which they are investing, run competently but they also have good corporate governance. Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken.

In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard.

Corporate Governance, therefore, Calls for Three Factors:

1. Transparency in decision-making,

2. Accountability which follows from transparency because responsibilities could be ‘fixed’ easily for actions taken or not taken, and

3. The accountability is for safeguarding the interests of the stakeholders and the investors in the organisation.

Codes for Corporate Governance:

Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organisations are supposed to observe. The Cadbury’s code in United Kingdom was the starting point, which led to a number of other codes. In India itself, we have the Kumaramangalam Birla code as a result of the committee headed by him at the behest of the SEBI.

Earlier, we had the CH coming up with the code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes, however, can only be a guideline. Ultimately, effective corporate governance depends upon the commitment of the people in the organisation. The very first issue of corporate governance in India is, do the India managements really believe in corporate governance?

Ethical, Legal and Administrative Framework for Corporate Governance:

Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, we cannot have good corporate governance.

The dramatic Enron case has highlighted how companies, which were the darlings of the stock market and held up as models for vigorous and innovative growth, can ultimately collapse like a house of cards as they were based on fraud and dishonesty. The association of the accounting firm Anderson has also raised a doubt about the credibility of even well regarded global players.

In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalisation from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. It is being suggesting that we should learn from, especially, the United States to see whether we can replicate similar conditions in our capital market.

It is not that the United States is free of scams. Right now the Enron issue is examined by a number of committees at different levels in the United States. At the end of all these examinations, they are likely to come with a better model. In the Indian corporate scene, we must be able to induct global standards so that at least, while the scope for scams may still exist, we can reduce the scope to the minimum.

It has been observed that the legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice.

We should approach the corporate governance issue in India not merely from the point of view of the Companies’ Act or the guidelines which can be issued like the Kumaramangalam code or the Bajaj code but look at the entire network of various rules and regulations impinging on business so that there is a an integrated holistic system created for ensuring that transparency and good corporate governance prevail.

The ethical temperature of any business or capital market depends on three factors. The first is the individual’s sense of values. The second is the social values accepted by the business and industry. Let us not forget that when Harshad Mehta Scam took place, it was claimed that the manner in which the bank receipts were being treated was the prevailing norm.

Perhaps a similar argument would have been given in the Ketan Parikh Scam. In other words, practices, which are later on found to be highly objectionable, become acceptable because that was the prevailing market practice. Social values will depend upon the standards set up by professional bodies like the Association of Chartered Accountants or Cost Accounts of India and so on.

The third and perhaps the most decisive factor is the system. It is here we face the main challenge. Our system encourages lack of corporate governance.

Some of the specific steps that should be taken to improve corporate governance are the following:

(a) The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous managements that we find in our country industries become sick, the industrialist do not become sick. BIFR has also been called the Bureau of Industrial Funeral Rites! It is high time we scrap the entire system. This will mean the abolition of SICA and organisations like BIFR thereunder. Mere tinkering with the system by making amendments is not going to improve the situation.

(b) The entire banking system and the Banking Secrecy Act call for a review. Our banking system is such that if you borrow one lakh of rupees, you are afraid of the bank but if you borrow ten crores of rupees, the bank is afraid of you. With the amount of NPA going beyond 58000 crores, it is high time that we amend the Banking Secrecy Act to reveal those who are wilful defaulters.

The Narasimham Committee’s recommendation about putting this condition at the time of issuing new loans can cover only to some extent the moral hazard. It is high time that practice of disclosing the name of willful defaulters is made more practical and timely. Publishing the names in the case of suits, which have been filed is of no value at all because by that time the matter is all but over.

(c) Laws like the Benami Transactions Prohibition Act and the Prevention of Money Laundering Act should be implemented effectively and vigorously. Agencies like the CVC can be used to ensure that corrupt practices are effectively punished because it is the atmosphere, which encourages proper corporate behavior.

In India, today, we have a system where the level of public governance is very poor. There is no fear of punishment at all. In such a situation it is only a saint who will be observing strictly the rules of corporate governance.

It can’t be denied that there are very honourable companies in India, which are following ethical practices but if the general environment is such that there is no fear of punishment, people are bound to be tempted to indulge in corrupt practices and moral hazards, which go totally against corporate governance.

So far as the public sector enterprises are concerned, thanks to the commitment, transparency and integrity of Shri Arun Shourie, the than Minister concerned, a lot of transparency has brought into the system of disinvestment. Nevertheless, we can expect at least for the ten years or so, the public sector will remain. It is necessary to bring in a sort of hands-off relationship between the administrative ministries and the public sector. As Chairman of the Committee, on Guidelines in 1997, N. Vihal had suggested to the Government a code of conduct to be observed by both administrative ministry and the public sector enterprises.

Unfortunately, the government took the technical stand that the recommendation was beyond the scope of terms of reference of the Committee. If, today, we want really to bring in better corporate governance in the public sector, introduction and strict observance of the code mentioned above is necessary.

In the ultimate analysis, it is the observance of corporate governance at the enterprise level or at the level of a body like the capital market will depend upon the top managements in-charge of the organisation or the body. It is necessary that they remember the three way tests for the ethics prescribed by Normal Vincent Peale and Kenneth Blanchard in their book, The Power of Ethical Management.

The Three-Point Test is as Follows:

(a) Is the decision you are taking legal? If it is not legal, it is not ethical.

(b) Is the decision you are taking fair? In other words, it should be a win-win situation for both the parties entering into an agreement or if it is a general policy or a multi-level agreement, there should be equal risk and reward to all concerned. If it is not fair then the decision is not ethical.

(c) The third decision is what can be called the Eleventh Commandment test. It is said by cynics that there are Ten Commandments in the Bible but there is Eleventh Commandment, which is hidden. You can violate all the Ten Commandments but Thou shall not be found out. If the decision you are taking is such that if it is known in the public through the media, will you feel ashamed? If you are feeling ashamed, then it is not an ethical decision.

The embarrassment caused by the Tehalka.com expose was because those figuring in the tapes were found guilty of violating the Eleventh Commandment.

Ultimately, corporate governance is the net result of the individual sense of values, the values held in society or part of a society like professional bodies or business associations and finally the system of public governance. If those who violate the norms are effectively punished then there is a fear and there will be adherence to the principles of corporate governance.

In a training programme attended by one of the bankers from India, a question was asked: If you are walking alone on a road and find a 10000 dollar bundle, will you pick it up? 90% said that they would. When the same question was modified slightly- You are walking alone on a road and there is a 10000 dollar bundle on the road but there is a 10% chance that there is a hidden camera somewhere and there is a 10% chance that the camera may be working, will you now pick up the bundle? 90% said that they would not.

What we lack in India today, which comes in the way of corporate governance is, there is a feeling that violators first may not be detected and even if detected, they can get away literally with murder. We will, therefore, have to focus very effectively on creating proper public governance and making changes in the various regulations impinging on the working of an enterprise or a body like the capital market, if we want to usher in an era of better corporate governance in the country.

Globalisation and the Convergence of Corporate Governance- The Case of Indian Software Industry:

The present study aims at understanding the convergence (or lack thereof) of corporate governance practices worldwide. That is, rules on books regarding corporate governance appear to converge in response to the pressures of global competition but not actual practices.

This introduction and conclusion from a recent working paper, Product and Labour Markets Globalisation and Convergence of Corporate Governance- Evidence from Infosys and the Indian Software Industry, looks at corporate governance mechanism developed by leading Indian software maker Infosys specifically, and other Indian firms more generally.

Our interviews with the top management of Infosys, and related field research in India, suggest that exposure to global capital markets is a result, rather than a cause, of Infosys’ decision to adopt world corporate governance standards. The proximate cause of the aspiration to good corporate governance at Infosys, in turn, in its need to attract talent with truly worldwide options, which in turn is necessitated by fierce global product market competition.

Part of our narration of the Infosys corporate governance case study is a description of the efforts on the part of its management to help institutionalise good corporate governance in India. Indeed, diffusion of corporate governance practices in India is rendered partly feasible by a coalition between firms and regulators, that serves to educate regulators and provides a blueprint for engineering at transition from shareholder to a shareholder-based corporate governance system.

Ultimately, however, the corporate governance standards at Infosys are exception rather than the norm in India. Some data on corporate governance in India suggest that most firms fall far short of the Infosys benchmark, including most firms within the software industry.

Further, our companion large-sample econometric analysis suggests that there is very little evidence that globalisation of any form is correlated with adoption of U.S. style corporate governance around the world. We therefore dedicate the last part of the paper 10 exploring why the effect of globalisation on corporate governance convergence might be limited. The case study is based on interviews and field research at Infosys in early 2001 and with several dozen field interviews with competitors and regulators over the past three years.

Conclusion:

Does product and labour market of globalization cause convergence in corporate governance? Our case analysis suggests that the answer to this conclusion is a constrained yes.

A summary of our interpretation of the case follows:

Software firms’, and especially Infosys, exposure to global product markets, first, and then to global talent markets, seems to have driven some adoption of shareholder-style corporate governance in India. In contrast to the stance taken by the existing literature on the convergence of corporate governance, we do not find much of a role for capital markets as drivers of this process.

If anything, Infosys and some other Indian software firms accessed global capital markets long after their exposure to global product and global talent markets had driven them to adopt good corporate governance practices, limited diffusion of such practices to other firms in the software industry and to other firms in India. We explore several reasons why, in practice, the effects of globalisation on corporate governance convergence are some/what limited.

It is possible that the effects of adoption decisions taken by Infosys, by other leading software firms and by the other leading firms in global industries m India, are only just beginning to be felt. That is, diffusion is only partial.

In ongoing work, we are hand-collecting large sample data to shed light on both a positive and a normative question. The positive question has to do with quantifying various barriers to the diffusion of U.S. style corporate governance. The normative question has to do with the extent to which such practices should diffuse in the emerging market context of India.