In the US, the Dow Jones industrial average closed on Friday at 11,444.61 and though it ended in positive territory, it was down 5.7 per cent (698.63 points) for the week, making it the largest point’s decline on the index since the week ending October 10, 2008. European stocks zigzagged down a slippery slope. The European Central Bank was preparing to intervene to support the bond markets in Italy or Spain. After the US markets closed, just to complete Friday’s doom and gloom picture, US rating agency Standard & Poor’s, after conceding that it had got its arithmetic wrong by $2 trillion, went ahead with downgrading the triple-A (AAA+) rating that the U S Treasury debt has held for 70 years to double-A (AA+). S&P said Washington hadn’t done enough to address the gloomy outlook for America’s finances. In India, the Nifty and the Sensex reacted similarly. The Nifty lost 120 points bringing the index down by 2.26 per cent to 5,204 and the Sensex went down by 2.19 per cent, ending the day at 17,305.87. The Indian currency has lost 1.26 per cent in a week against the greenback. Amid all the ruin, only the yellow metal shone brightly at 24,170 per 10 gm.
In this environment, Monday, August 8, 2011, does not appear to be the most opportune day for reading a column on corporate governance and Clause 49. That is because investors, stock market participants and policy-makers in India will be keeping their fingers crossed that all the King’s horses and all the King’s men will keep the stock market humpty dumpty up again.
The voices that matter in the Indian economy immediately made themselves heard on Friday to assure us, wanting us to believe that our markets and economy are safe, our growth story intact and we will not be affected by what happens in the rest of the world. These statements become credible only if the assurances and worries are about the right things and certainly the level of stock market indices is not the major one. Stock market setbacks happen and will continue to do so and will not be insulated from global crises. But so long as the policy focus is on the right priorities the economy will gain the resilience to withstand the shock of the temporary tsunamis. Right now our worries are not external factors, but internal ones — inflation (hence on the price rise and interest), quality of growth and distribution of wealth (whether concentrated or diversified), employment and governance of the government and the corporate sector. Other matters depend on the policies and the implementation but as far as governance is concerned, it is important for policy-makers and regulators to focus on getting the plumbing for governance right. For the listed companies, Clause 49 of the listing agreement of the stock exchanges provides the most effective plumbing. But is the present plumbing enough, can it bear the current load or are there any reasons for repair? An enquiry into these questions should become one of the challenges for the Securities and Exchange Board of India (Sebi), following a successful revamping of the Takeover Regulations. There are many good reasons for the present framework being due for repair if not an overhaul.
First, it must be recognised that there are two legal frameworks that impinge on corporate governance in India. One is the Companies Act, which is the legal framework for regulating all corporate activities, including governance and administration of companies, disclosure requirements, and shareholders’ rights. The ministry of corporate affairs administers it. But corporate governance as a phrase does not find a place in the Companies Act. Clause 49 of the Listing Agreement, on the other hand, focuses on corporate governance. But it is applicable to listed companies. It is under Sebi’s purview. Two different bodies and two different frameworks with overlaps.
Second, since 2005, the Companies Act is being sought to be revised by amending it. The new Act is supposed to have sections on corporate governance and all its accoutrements. Seven years on we are still waiting for the Act to be passed by Parliament. It is not clear if the sections of the Act will be harmonious with the provisions of Clause 49. This is vital. Dichotomous provisions between the two will create serious confusion among the companies, give rise to turf battles and weaken compliance and enforcement. So Sebi needs to begin the process of a review to see how the dichotomy can be avoided.
In December 2009, the ministry of corporate affairs issued nicely worded Corporate Governance Voluntary Guidelines and new Corporate Social Responsibility Voluntary Guidelines. Voluntary Guidelines like Codes are good and useful but not enforceable. But there are places where these work well and places where these don’t. It depends on the culture and ethos and in a country. In India, arguing in support of Guidelines and Codes is, in a way, saying let us not try and enforce things.
Third, Clause 49 may have become dated. It was incorporated as a new Clause in the Listing Agreement in 2000, subsequently amended in 2004, implemented in 2006 and there was a small amendment in 2008. But the corporate governance landscape, both in India and globally, has changed and is still evolving. There was the global financial crisis in 2008 and, recently, scandals involving some US companies and personalities. In India, we had the accounting scandal at Satyam Computers. The scandal involving Rupert Murdoch and News Corporation is causing endless worries to the Financial Reporting Council in the UK. These have given rise to serious governance issues straddling roles of the boards, independent directors, risk management, executive compensation and ethical and value-based management. Whether the present Clause 49 adequately addresses these issues needs to be examined.
Fourth, there are certain non-mandatory provisions in Clause 49. The provisions related to the nominations committee, remuneration committee, the whistle blower policy, and board evaluations are a few of them. These were deliberately kept non-mandatory, because in 2004 it was believed that it was too early to introduce make them mandatory. It may now be time to make these provisions mandatory, especially the board evaluation. This will by far be the most significant change that will help boards measure their performance. Most of the mature markets have implemented these provisions.
It may be argued that markets or companies that have all these provisions also have their share of scandals. Such an argument is as facetious as arguing that despite traffic laws road accidents still occur, and so do murders in spite of the Indian Penal Code.
The author is former executive director of Sebi and is currently associated with the IFC’s Global Corporate Governance Forum of the International Finance Corporation and the World Bank.
These views are personal pratipkar21@gmail.com
