Corporate governance refers to the system of control mechanisms through which investors in companies assure themselves of getting a return on their investment. However, the basis of corporate governance rests on the divorce of ownership and control in modern corporations. In large companies, if the shareholders are a disorganised body, then it may not be beneficial for them to closely monitor the company, given the cost-benefit trade off of such monitoring. This may result in managers pursuing their own goals that may be in partial or complete disregard of shareholders' objectives.
Adam Smith first identified this divide between ownership and management in 1776. He believed joint-stock companies could never prosper because managers had no incentive to take care of the interests of widely dispersed shareholders. "Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company," he wrote in The Wealth of Nations. Therefore, deducing that interest of the modern corporation and its large numbers of shareholders (as its owners) and individuals (managers or agents) appointed or allowed to be appointed by such owners to exercise day-to-day control and management over such corporation may differ. Such differences may hamper the interest of companies, as instead of enhancing the wealth of the owners, managers may strive for personal gains on the cost of the enterprise. Following Smith, other western scholars have significantly contributed in the evolution and development of the corporate governance as a concept such as Bearle and Means (1932) and Jesen and Meckling (1976).
Evolution of corporate governance in India
Evolutions of corporate governance in India may be formally traced to the establishment by the Confederation of Indian Industry, in 1996, of a National Task Force under the chairmanship of Rahul Bajaj. Later, Sebu formed two committees to look into the issue – the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy in 2003.
Existing norms of corporate governance
The Companies Act, 1956 does provide for certain legislative norms in relation to corporate governance in India, such as Section 198 (overall maximum managerial remuneration), Section 299 (disclosure of interests by director), Section 309 & 269 (remuneration of directors) and certain other section of the Act read along with Clause 49 of the Listing Agreement which provides for procedure relating to the disclosures, composition of board of directors, composition of audit committee including the appointment of independent directors and certain disclosures relating to accounting treatment, related party transaction. However, at present, corporate governance is still seen as a notion embodying lines of accountability that are defined by the nature of the relationship between the company and key corporate individuals. Therefore there is a certain need to bring more accountability in decision making of directors and the role and capability of independent directors.
Need for Corporate Governance-Voluntary Guidelines 2009
The existing legislative and regulatory framework in India in relation to corporate governance has been derived from its Anglo-American counterpart. However, the corporate governance challenges in India are very unique. Anglo-American governance issues are essentially concentrated on disciplining managements that have ceased to be effectively accountable to owners. However, the problem in the Indian corporate sector is that of disciplining the dominant shareholder and protecting the minority shareholders.
It was realised that issues of corporate governance abuses by the dominant shareholder could not be addressed only by forces outside the company such as market and/or regulator. Therefore the regulators are facilitating and encouraging measures such as enhancing the scope, frequency, quality and reliability of information and disclosures for promotion of an efficient environment for controlling dominant shareholders.
After the Satyam fiasco, it was speculated that the government and the regulator would formulate a stringent set of corporate governance rules. However, the Corporate Governance-Voluntary Guidelines 2009 ("Voluntary Guideline") provides for partial participatory approach to address the contemporary corporate governance issues in India. Some of the important recommendations of Voluntary guidelines are as follows:
Appointment of the Director
. Issuance of formal letters of appointment (along with terms of appointment) to non-executive directors, independent directors and executive directors. These letters of appointment are suggested to be disclosed to shareholders at the time of ratification of appointment or re-appointment. The letters may also be placed on company website and/or the stock exchange website.
. Further, to prevent unfettered decision-making powers to a single individual or set of promoters, it recommends clear demarcation of roles and responsibilities of the Chairman and the Managing Director/CEO;
. Nomination committees consisting of majority independent directors for searching, evaluating and recommending appropriate independent and non-executive directors
Independent directors
. Attributes for independent directors such as integrity, experience and expertise, foresight, managerial qualities and ability to read and understand financial statements, as well as procurement of a Certificate of Independence from such independent directors at the time of their appointment and annually thereafter;
. Tenure of the independent director which is proposed to for not more than six years.
Remunerations
. Clear guiding principles for remuneration to the directors and key executives and disclosure thereof;
Responsibility of the Board
. Training of directors;
. Enabling quality decision making;
. Risk management & evaluation of performance of board of directors & committees or individual directors;
. Formulation of strategy for ensuring compliance with laws.
Conclusion
Voluntary Guidelines signify the shift in the policy of the government, where the existence of corporate governance is recognised beyond the legal and regulatory framework and acknowledges the inherent limitations in enforcing many of its aspects through legislative or regulatory means. Therefore, it has been considered necessary to frame such set of guidelines to overcome the same.
The guidelines also signify the growing confidence of the government in the private sector and such voluntary guidelines indicate that India has come a long way from being a 'welfare state' to 'regulatory state' to now at the cornerstone of the new era of 'participatory state' where government actively seek the participation of the private sector for changing the face of corporate India.
Evolving an indigenous structure and challenges of developing and implementing good corporate governance systems suitably customise to Indian needs would still require combined efforts from the side of the government and the private sectors and Voluntary Guideline is a welcomed first step towards ‘participatory governance’.
Reena Grover is Partner, and Alok Sonker is Associate at law firm Rajani Associates
