The Hindu Business Line : A wake-up call

THE FINANCE MINISTER, Mr P. Chidambaram's lament that India Inc has not progressed enough on the issue of corporate governance is a timely wake-up call in the context of company performance in recent years. At a time when the stock market has been generating handsome returns, raking up corporate governance issues may seem ill merited, but the euphoria over the current rise in equity values should not obscure the basic fact that the returns over the last 10 years have by no means been exceptional. The benchmark BSE Sensex returned no more than 4.5 per cent of compounded annual returns between 1993-94 and 2003-04. Even if one factors in the recent rise in stock prices, the overall numbers go up by only an additional two percentage points.

That these compare poorly with the risk-free rate of returns that investors would have earned on post-office term deposits is a sad commentary on the quality of returns that listed corporates have generated for their shareholders. The fickle nature of the market alone cannot be blamed for the poor returns as the fundamentals of corporate performance too reflect this trend. With the exception of 2003-04 — the best year in recent times for corporate performance — the last decade saw listed corporates barely generating a return on the shareholders' funds superior to that got from government securities. Mr Chidambaram's observation that the `independent directors' appointed to the board of a company are not truly so is not going to surprise any keen observer of the process of governance in Indian corporates. Such a perception is in the very nature of the process of selection of such nominees to the board. Even if they have not actively canvassed for it, they surely owe their position on the board, and what little pecuniary advantage they get, entirely to the munificence of the promoters rather than to any vigilant activism of minority shareholders. The reform has to be, therefore, in the constitution of an electoral college consisting entirely of non-promoter shareholders and an institutional mechanism that brings them together in a virtual if not the physical sense to chose the persons to represent the interests of shareholders at large. In the absence of such a framework, `independent directors' can neither be truly objective in their conduct nor erase the public perception that they mirror only the interests of a section of the shareholders.

But the tone of the Minister's lament is somewhat mystifying suggesting an appeal to the good sense of corporate managements to correct their ways. If he is actually convinced about the merits of his case, the Minister should have spoken of his resolve to get the necessary legislation initiative organised within the government to remedy what he regards obstructive ways of incumbent managements. The remarks taken as a whole give the impression of a certain sense of helplessness in enforcing standards of good corporate governance. It would indeed be a sad day for Indian democracy if the `regulated' — the organised corporate sector — has captured the regulatory process of public administration, permitting only such initiatives that do not hurt entrenched interests.

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