For a firm relationship

Is there a relationship between good corporate governance and market capitalisation? So far, there is no evidence to suggest that investors are willing to pay more for companies that adopt good corporate governance norms. Opening your accounts for scrutiny need not make shareholders wealthier. Investors are interested only in the quarterly numbers. The "cleanliness" of these numbers is often glossed over, and all the more so in a euphoric market.

In part, that is because there do exist relationships between non-core functions of a company and market capitalisation. In India, the efficacy of public relations (PR), for instance, is often linked to the rise in share price. So when corporate governance does get management attention, it is largely through the prism of those links. It is not seen as an end in itself""only a means to improve the stock market perception of a company. Unfortunately.

Yet, there is good reason why companies should adopt stringent corporate governance practices. Because of stock options, executives now have a vested interest in keeping a company's reported numbers nice and sparkling, even if it means misreporting performance. This is the biggest danger shareholders face, more so when the business cycle is down.

This book, Corporate Governance: Myth to Reality, makes a strong case for good corporate governance. Kshama V Kaushik and Kaushik Dutta, both of whom are chartered accountants, have for long had an insider's view of corporate governance and are, therefore, well suited to write on the subject. The husband and wife team has written a fine book which is a must read for anybody interested in corporate governance. The scope of their coverage is extensive and the depth of their knowledge is amazing.

And it comes just at the right time. Recent investigations by the Securities & Exchange Board of India (Sebi), the stock market watchdog, into the phenomenal rise in penny stocks shows that the problem of market manpulation and fudging of accounts is alive and kicking in the country. Those who thought the Ketan Parekh episode was the last of its kind came in for a rude shock.

Public memory in India is short. A decade ago, it was felt that retail investors had learnt their lesson after they had burnt their fingers in the stocks of plantation companies, wind energy farms and non-banking finance companies. But still, all caution was thrown to the winds when the next boom came, spewing money all around.

Fortunately, the country is going to have new corporate governance norms from next year onwards, with Sebi and the Union government currently adding final touches to the new guidelines. This is in keeping with global trends. Worried about the political ramifications of scams lurking in capital markets that could wipe out billions of dollars of investors' wealth, governments the world over are worried about investor protection. In the US, the debate over financial irregularities in such firms as WorldCom and Enron has resulted in the Sarbanes-Oxley Act. The UK too has moved forward after the Cadbury and Greenbury reports, with no less attention paid to the recommendations of the Higgs report.

In the West, large-scale mischief has taken place despite the active monitoring of large institutional investors, which ensures as much transparency as possible in the accounts of a company. In India, this safety mechanism has not even been in existence, though banks and financial institutions have for long had a presence on the boards of companies.

Sadly, these directors have been performing mostly the role of sleeping partners in the enterprise. Such have been the power equations. It is an open secret that the functioning of a company's board is dominated by promoters and their cronies. The promoters' political connections have ensured that there is no resistance from the nominees of banks and financial institutions. Instances of independent directors putting their foot down are a mere handful, and that too, only upon being pushed to the wall.

The biggest challenge faced by India Inc today is to find good-quality independent directors. Their role in corporate governance is crucial.

Above all, corporate governance has to be driven from the top into every small function of the company. It is a culture that must come to guide every employee. The relationship with shareholder wealth will then become a matter for more than just the CEO, the "Chief Ethics Officer". CORPORATE GOVERNANCE
MYTH TO REALITY

Kshama V Kaushik & Kaushik Dutta
LexisNexis Butterworths
Price: Rs 600; Pages: 257