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Corporate Governance & Compliance – India

Corporate Governance & Compliance – India

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.

Corporate governance has emerged as an important both in India and globally. Expectations of stakeholders are extremely high and the scrutiny by regulators and investors incredibly stringent. As a consequence, Indian companies are proactively implementing measures for the same. Going forward, one of the most important challenges for Board members is to build a foundation of trust with management, the investment community, regulatory agencies and the public. The stakes are high and the margin for error is low and while new standards are emerging, one thing remains clear: the responsibility to adopt sound governance practices has been placed squarely on corporate Directors and officers.

My favorite is one from the Harvard Business School. It found that “ethics-based” companies increased their net income 756 percent – versus just 1 percent for companies who put profit first. My message today is that principled economic behavior is a long-term investment in the security of nations. The world cannot afford economic misconduct. Now multinational corporations everywhere to lead the world to globalization’s next frontier – through principled codes of conduct that bolster the rule of law. Not just the letter of the law – not just minimum compliance with some baseline code. But, instead, something that will really make a difference! Principled codes of conduct that answer first to the moral underpinnings that support all law. Principled codes of conduct that set objective, quantifiable standards. Principled codes of conduct that use independent monitoring – and require transparent communication with the public.

Indispensable Principles of Corporate Governance:

o Discipline in operations
o Transparency in dealings and disclosures
o Accountability to shareholders
o Responsibility of company’s action
o Social Responsibility
o Improving group dynamics and harnessing individual talents
o Enhancing early-warning mechanisms for critical risks
o Mitigating exposure to liability
o Building credibility and trust with stakeholders
o Embedding sustainability as a corporate value

What is the Satyam fiasco all about?

For me, Satyam’s case is a typical example of fraud that are extremely difficult to detect and prevent. The chairman of Satyam diligently hatched a plan to defraud its stakeholders and to gain advantage to itself.

There is a sufficient law to deal with this kind of economic offences and corporate governance. In a global environment, principles are important because rules cannot cover all situations, however there are following observations that encourages the non compliance in India:

Non compliance is never taken seriously by the companies as there is minimum penalty for non compliance.
Minimum penalty of few hundreds rupees
Most of the offences for non compliance can be compounded by paying the fine.
The government department do have the appropriate expertise or manpower to detect the non compliance
The prosecution agency also do not have the expert who specialise in this kind of expertise, hence the most of the offender can not be prosecuted.
Lack of political will
Typical Indian attitude that is “chalta hai”

Strong punishment i.e. life term for offenders
There should be specialised investigating agency and that should be allowed to hire the best professionals.
More power to independent directors and they should be allowed to engage the professional to explain the company’s record/ accounts.
Effective & ongoing training to all the employees
Whistle blowing policy be made compulsory to all companies

The principled conduct of multinational corporations is absolutely essential in planting the seeds of stability and prosperity for all. Multinational corporations account for one-third of the world’s Gross Domestic Product, and two-thirds of world trade. Multinationals can be a powerful influence for good – especially in countries whose governments lack a strong tradition of democracy and the rule of law. Therefore, it is no longer sufficient for multinational corporations to do merely what is legal. In every instance, multinational corporations must do what is right – through their conduct, not just their words.

In a speech titled “Globalization’s Next Frontier: Principled Codes of Conduct that Bolster the Rule of Law,” Parrett told global ethics and business leaders, and representatives from non-governmental organizations (NGOs) and academic institutions that globalization and world security itself could be jeopardized unless multinational corporations develop ethical conduct that adheres to values and principles rather than just written law.

Law makers in India, feel the need to ascertain the merits of encouraging a principle-based approach (like in the case of the combined code in the UK) to compliance – where the nature, size and complexities of a business govern compliance and disclosures – instead of a standard rules based approach for universal compliance (like in the US). Companies in India must have the flexibility to ascertain those aspects which are practical to comply with and others where they can provide suitable and logical explanations for non compliance. This will enable them demonstrate their true intend to comply, where practical, and make to transparent disclosures in other cases.

In India, guidelines for corporate governance are provided in clause 49 of the listing agreement and also in various sections of the Companies Act. Industry experts hold view that once appointed, the performance and contributions of these directors should be monitored and evaluated objectively with peer reviews serving as a means of such evaluations. A stronger corporate governance framework is needed to prevent Satyam-like financial frauds. There is a need to strengthen regulators and company laws to improve corporate governance, by the corporate ministry. A new Companies Bill, which is pending in Parliament, would make regulation more stringent for auditors. The new bill seeks to revamp archaic laws to help India’s growing corporate sector adopt international best practice, and make boards and senior management of companies more accountable.

What is to be kept in mind is that in India adequate safeguards are provided for in the form of various laws but the penalty stipulated for is comparatively meagre and thus the wrong doers have no fear of punishment. Only if the punishments to be imposed are made stringent and it acts as a deterrent can it be expected that such frauds can be controlled in future. More so, there is no expertise of the implementing authorities for detecting and curing the Economic Offences. There is a need to make a separate body to look into the affairs and implement the laws and other provisions to curtail such offences. There is also a lack of political will power to curb such offences, the politicians take a lenient view and leave the investigation and other vital steps into the hands of CBI which is not a body made to specifically deal with such white collar crimes. Unless there reason enough for the miscreants to be scared of penal provisions that send a shiver down their spine. Such offences will continue to happen and we will keep thinking of devising ways to tackle with them.