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Along with the structure of ownership, the structure of company boards has considerable
influence on the way the companies are managed and controlled. The Board of Directors
is responsible for establishing corporate objectives, developing broad policies and
selecting top-level executives to carryout those objectives and policies. The board also
requires management's performance to ensure that the company is run well and
shareholder's interests are protected.
Company boards are permitted to vary in size, composition and structure to best serve the
interests of the corporation and the shareholders. Boards can be single-tired/two-tired
with regard to the size of the board, opinions and practices vary. Some argue that the
adequate size is to range from 9 to15. Some put the figure at 10. Yet others recommend a
minimum of 5 and a maximum of 10.
Along with the notion that the structure of ownership matters in Corporate Governance is
the notion that the financial structure of the company ie., Proportion between debt and
equity, has implications for the quality of governance. Recent research has shown
contrary to the Modigliani-Miller hypothesis that the financial structure of the firm has no
relationship to the value of a firm, that the financial structure does matter, it is no secret
that the lenders exercise significant influence on the way a company is managed and
controlled. Banks can perform the important function of screening and monitoring
companies as the (banks) are better informed than other investors. Further, banks can
diminish short-term biases in managerial decision-making by favouring investments that
would generate higher benefits in the long run. Banks play a more favourable role than
other investors in reducing the costs of financial distress.
The legal, regulatory and political environment within which a company operates
determines in large measure the quality of Corporate Governance. In fact, Corporate
Governance mechanisms are economic and legal institutions and often the outcome of
political decisions. For eg. The extent to which shareholders can control the management
depends on their voting rights as defined in Company Law and the extent to which the
market for corporate control efficiency operates to discipline under performing
management will depend on take-over regulations.
Companies are regulated by the Companies Act 1956, as amended up to - date. The
Companies Act is one of the biggest legislations with 658 sections and 14 schedules. To
ensure Corporate Governance, the Act confers legal rights to shareholders to
SECURITIES LAW:
Primary security law in India is the SEBI Act. Since its a inception in 1992, the Board
has taken a number of initiatives towards investor protection. One such initiatives to
mandate information disclosure both in prospectus and in annual accounts. While the
company's Act itself mandates certain standards of information disclosure, SEBI Act has
added substantially to these requirements in an attempt to make these documents more
meaningful.
Another aspect of the SEBI regulations is that in most public issues, the promoter are
required to take a minimum stake of about 20% in the capital of the company and to
retain these shares for a minimum lock in period of three years. Finally, the Board
constituted a committee under the chairmanship of Kumaramangalam Birla to suggest
ways to promote and raise the standards of Corporate Governance in listed companies.
The clause 49 provides for the optimum composition of executive and non-executive
director's setting up of a qualified and Independent audit committee;' remuneration of
director's; management discussion and analysis report to form part of annual report to the
shareholders; a separate section on corporate governance in the annual reports of the
company; for information to be furnished in the report on corporate governance; and
auditor's compliance certificate to the effort that all the conditions of corporate
governance have been complied with.
In a well functioning capital market, there is a strong incentive for corporate management
themselves to voluntarily adopt transparent processes and subject themselves to external
monitoring to reassure potential investors. In last few years, Indian companies voluntarily
accepting International Accounting standards though they are not legally binding. They
have voluntarily gone for greater disclosures and more transparent governance practices
than are mandated by law. They have sought to cultivate an image of being honest with
their investors and of being concerned about shareholder value maximization.
Capital market is very good at micro level judgments and decisions. In fact, the market is
taking micro-decisions all the time. It is its success in doing so that makes it such an
efficient allocator of capital. Capital market makes sense for the regulator to pass on as
much of the burden of ensuring corporate governance to the markets as possible. The
regulator can then concentrate on making the markets more efficient of performing this
function.
Equity holders as investors have their nominees in the board of companies. These
nominees can effectively block resolutions which may be detrimental to their interests.
STATUTORY AUDIT:
It is yet another mechanism directed to ensure good corporate governance Auditors are
the conscience - keepers of shareholders, lenders and others who have financial stakes in
companies. As the Cadbury committee observed "The annual audit is one of the corner
stones of corporate governance. Given the separation of ownership from management,
the directors are required to report on their stewardship by means of the annual report and
financial statements sent to the shareholders. The audit provides an external and objective
check on the way in which the financial statements have been prepared and presented and
it is an essential part of the checks and balances required.
Codes of Conduct:
The code is thus based on checks and balances, especially at the level of the Board of
Directors and the chief executive, to guard against undue concentration of power and
adequate disclosure to enable those entitled to have the information they need, in order to
exercise their rights. It comprises four sections; Role of the Board of Directors - Role of
non-executive Directors - Executive Directors - Financial Reporting and Controls.
The confederation of Indian Industry (CII) issued a draft code of "Desirable Corporate
Governance" for the Indian Industry in April 1997 in response possibly to the finance
ministries veiled threats that soften the self-regulatory regime, greater the likelihood of
harsher Government regulations. The CII Code, is based on the explicit assumption that
"Good governance helps to maximize shareholders value which will necessarily
maximize corporate value and, thereby, satisfy the claims of creditors, employees and the
state" whether the code will stimulate a change in corporate governance only time will
tell.
THE PRESENT:
The corporate governance movements in India picked up momentum after deback of big
companies such as Enron, world com and BCCI Bank. Those were times when the
confidence of the financial community, shareholders and investor took a beating the
world over. It was around that time that foreign financial institutions started investing
money in Indian companies, which also triggered the need for greater accountability.
Today, fund managers view firms such as Tata Motors, ITC, Ranbaxy, Infosys and Hero
Honda Motors as having higher governing standards. Luckily many companies are
exhibiting good governance standards.
The Economic Times did a survey of Indian corporate governance and published its
finding in its issue dated August 19, 2005. The criteria used by the Economic Times
Survey to identify the winners are;
- Accounting quality
- Value creation focus
- Fair policies and actions
- Communication
- Effective governing board
- Reliability
THE FUTURE:
As we go to the future, corporate governance will become more relevant and a more
acceptable practice. Seeds are already sown towards honest but practices. More and more
progressive companies are drawing and enforcing codes of conduct, are accepting
tougher accounting standards and are following more stringent disclosure norms than are
mandated by law. These tendencies would be further strengthened by a variety of forces
that are acting today and would become stronger in years to come. Such forces are;
a. Deregulation: Economic reforms have not only increased growth prospects, but they
have also made markets more competitive. This means that in order to survive,
companies will need to invest continuously in a large scale.
e. Tax Reforms: Tax reforms coupled with deregulation and competition have tilted the
balance away from block money transactions. This means the worst forms of mis-
governance less attractive than in the past.