The Hindu Business Line : Bean counters vs business sense

THE Companies (Amendment) Bill, 2003 has been cooling its heels for nearly two years now. Meanwhile, the Government has circulated a Concept Paper on the company law it has in mind and also formed a committee to consider how best the law can be recast. The committee has the advantage of being able to go into the many studies on company law that have been made in India, the UK and the US recently.

These include the studies by The Cadbury Committee (the UK, 1992); The National Association of Corporate Directors (the US, 1995); the Kumaramangalam Birla Committee on Corporate Governance (1999); the Sarbanes-Oxley Act, US (2002); the Naresh Chandra Committee on Corporate Audit and Governance (2002); the Naresh Chandra Committee on regulation of private companies and partnerships(2003); the Advisory Group on Corporate Governance constituted by the Reserve Bank (2001); and the Advisory Group constituted by the Standing Committee on International Financial Standards and Code (2001).

There has been no dearth of suggestions on the subject. The deficiency has really been in implementation. In fact, any one who is familiar with the facts of the Enron case would agree that lip service had been duly paid by Enron to all the hackneyed tenets/recommendations.

It is not without significance that one of the well-known firms of accountants associated with Enron has had to pay enormous amounts for getting its offences compounded in law. If a company flouts rules of financial discipline, the solution does not lie in mandatory submission of all business in the company to the control of an `audit committee'.

It is a facile but totally wrong approach. Nowhere in the world, initiative, resourcefulness and business acumen are subordinated to the decisions of the audit/accounts wings of a company.

There may be outstanding leaders with a natural flair for running a business among persons with accounts qualifications and experience but it will be perverse to proceed on the assumption that the right to veto a proposal should rest with the audit committee.

Left to itself an audit committee will generally decide in favour of prudence/safety at the cost of initiative and risk-taking. Accountants can be placed in charge of trusts where the dead man's hand rules and not in a business which is based on calculated risks, planning and competition.

It will be suicidal for a company in which the will of the majority of directors prevails to subordinate the initiative, authority and resourcefulness of the board to an audit committee. Notwithstanding the reports of the innumerable committees on this subject, the issue seems to require reconsideration.

There are very few big companies in which financial institutions do not have a substantial interest. Is it not in their interest to watch what is happening in the company?

If the company is treated as the piper and is being paid by either the promoter or the financial institution, can there be any reasonable doubt on the view that it is the person paying the piper who should call the tune?

If the promoters' group, which is managing the company's business, does not agree with any verdict of the audit committee, should it not be given the privilege of overruling the recommendation of the audit committee subject to the condition that the matter is placed before the general body of the company within the following three months?

(By arrangement with Corporate Law Adviser, New Delhi.)

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