The Hindu Business Line : Too good to be an exception

CORPORATE governance, as a subject, is evolving. Different countries are attempting new legislation to redefine corporate governance practices to ensure that corporates turn squeaky clean in their disclosures.

The Organisation for Economic Cooperation and Development (OECD), a body which seems to be having a say in all things important, such as transfer pricing, brought out principles for corporate governance in 1999 itself. Most of the provisions enshrined therein seem relevant to develop a comprehensive code for corporate governance.

Shareholder rights

The principles begin by stating that the corporate governance framework should protect shareholders' rights. Shareholders have a right to:

secure methods of ownership registration;

convey or transfer shares;

obtain relevant information on the corporation on a timely and regular basis;

participate and vote in general shareholder meetings;

elect members of the board; and

share in the profits of the corporation.

In addition, shareholders have the right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes, such as:

amendments to the statutes, or articles of incorporation or similar governing documents of the company;

the authorisation of additional shares; and

extraordinary transactions that in effect result in the sale of the company. In addition, shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed in advance about the date and timing of such meetings.

It is also a cardinal rule of good corporate governance that capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed and that markets for corporate control should be allowed to function in an efficient and transparent manner.

Shareholders should also consider the costs and benefits of exercising their voting rights.

Equitable treatment of stakeholders

The next portion of the guidelines detail about the equitable treatment of stakeholders which basically mean that all shareholders of a certain class must be treated equally and they should have the same voting rights within classes.

Good corporate governance necessitates prohibition on insider trading and self-dealing and members of the board and managers should be required to disclose any material interests in transactions or matters affecting the corporation.

The disclosure requirements specified by the OECD state that disclosure should include, but not be limited to, material information on: a) the financial and operating results of the company; b) company objectives; c) major share ownership and voting rights; d) members of the board and key executives, and their remuneration; e) material foreseeable risk factors; f) material issues regarding employees and other stakeholders; and g) governance structures and policies

Financial information

Other important requirements are that financial information should be prepared, audited and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit, an annual audit should be conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented and channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users.

Board responsibilities

The principles state that:

Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders.

Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly.

The board should ensure compliance with applicable law and take into account the interests of stakeholders.

The board should fulfil certain key functions, which includes: i) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

ii) Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

iii) Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.

iv) Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

v) Ensuring the integrity of the corporation's accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.

vi) Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.

vii) Overseeing the process of disclosure and communications.

In India, SEBI belled the cat by drafting a code for corporate governance on the basis of the recommendations of the Kumarmangalam Birla Committee. Clause 49 of the listing agreement has been amended to incorporate clauses relating to corporate governance.

A major part of the principles enunciated by the OECD have been incorporated in the Code. However, there seems to be a general impression that these codes are applicable more to public limited companies than to private limited ones.

It is not out of place to mention that good corporate governance is an ethic by itself and one need not have to wait for the garb of a public company to practise them.

Since good corporate governance practices stem from the effort and cooperation of an eclectic assortment of people such as the top management, employees, shareholders and bankers, it would be worth the while to draft a comprehensive code applicable to all in order that good corporate governance practices become the rule rather than the exception.