The Hindu Business Line : Don't take corporate governance for granted

CORPORATE governance was not in the agenda of Indian companies until the early 1990s. One would not find any reference to this subject in any book of law or management studies.

In India, although weaknesses in the system — such as undesirable stock market practices, boards of directors without adequate fiduciary responsibilities, poor disclosure practices, lack of transparency and crony capitalism — were crying for reforms and improved governance, there was no real push. Albeit slowly, the momentum gathered once the liberalisation processes was initiated and the economy began to be opened up. The Securities and Exchange Board of India (SEBI) constituted a committee on corporate governance under the chairmanship of Mr Kumar Mangalam Birla to raise and promote the standard of governance in the case of all listed companies. The process thereafter started moving fairly fast. The report of the committee was approved by SEBI at its meeting held on January 25, 2000.

Whistle blowing

Any discussion on corporate governance is not complete without addressing the issue of `whistle blowing'. This is an act by which an employee in an organisation makes public announcements of incidents of malpractices within the organisation or otherwise perpetrated by the organisation. This usually happens when the person `blowing the whistle' does not get response from within the organisation to check or stop the practices in question.

The whistleblower is at great personal risk of losing his/her job or being punished otherwise by the affected persons in authority.

In the US, the regulators have recognised the great role of whistleblowers in tracking high-profile scandals in large organisations, which would have otherwise not come out. In fact, women employees not highly placed in the organisations stood out in their extraordinary efforts. Naturally, the question of protection of whistleblowers came up at the highest levels among regulators and commensurate provisions have been incorporated in the SOX Act, 2002.

The sweeping provisions towards protection of the whistle blowers include, among other things, imprisonment up to 10 years of anyone retaliating against a corporate whistleblower. It is surprising in this regard that the recommendations of the SEBI committee on corporate governance, under the chairmanship of Mr N. R. Narayana Murthy, evoked negative response from some in the corporate sector.

The recommendations, intended to curb unethical and improper practices in corporates, are criticised as being impractical. The recommendations stressed the need for employees in an organisation to have the right of access to the company's audit committee without necessarily informing the superiors.

It is further suggested that this right of access is to be communicated to all employees through internal circulars by the companies.

It is further recommended that a company's employment and personnel policy should provide a mechanism to protect whistleblowers from unfair termination and other unfair prejudicial employment policies. Some corporate managers expressed a fear that this may breed indiscipline and lead to a company being flooded with frivolous complaints.

In response, it has to be said that even if the fears expressed are real the corporates cannot avoid such situations. Over time, the audit committees, or whichever forum it is in an organisation, would come to grips with the problem. Perhaps to avoid frivolous and vexatious attempts, at the beginning stage itself, it can be carefully examined that there is prima facie evidence of illegality, criminality, miscarriage of justice, breach of regulatory law, harm to public health or safety, serious damage to environment, attempts to cover up such malpractices, and so on. At the same time, if it is established that complaints are made with mala fide intentions on the part of the complainant, protection can be denied in such cases.

What is to be appreciated is there have to be deterrents in an organisation to help curb malpractices at the starting point itself. It would also be a wakeup call for the audit committees not to be passive to the wrong doings of the management. There are many recent instances that point to the general laxity in governance on the part of corporates. Some corporate bigwigs vehemently oppose well-meaning pieces of legislation.

The new law on recovery of bank loans is a case in point. The mandated covenants which have been agreed to are not complied with by even reputed companies, including some MNCs.

Despite the minor problems it may create, it is important that whistleblowers are encouraged and protected.

Accounting Standards and practices

Accounting Standards are policy documents aimed mainly at producing a set of credible financial statements. Considering the current global reach of corporate entities, Accounting Standards play a vital role in the preparation of internationally acceptable financial statements in harmonisation with diverse accounting policies and practices.

The basis of preparation of statement and presentation should be consistent and credible. The Accounting Standards deal mainly with the system of financial measurement and disclosures used in producing a set of fair financial statement.

In India, generally accepted accounting practices (GAAPs) are set by the Companies Act, 1956, the Institute of Chartered Accountants of India and regulatory agencies such as the RBI and SEBI to align accounting practices with the internationally accepted accounting practices

Recognising the need for formulation of Accounting Standards in India, the Council of the Institute of Chartered Accountants of India (ICAI) constituted the Accounting Standards Board (ASB) in 1977. The ICAI is a member of International Accounting Standards Committee (IASC) and supports the objectives of the IASC, which was formed in 1973 and is the sole independent body charged by its member professional bodies with authority to issue International Accounting Standards (IASs).

While formulating Accounting Standards in India, the ASB gives due consideration to integrate them to the extent possible in the light of the conditions and practices prevailing in India. Accounting Standards seek to suggest rules and criteria of accounting measurement.

In the initial period, Accounting Standards are recommendatory in nature in order to smoothen the process of transition.

However, it has to be noted that though the Indian Accounting Standards are mandatory under the Companies Act, 1956, they are subordinated by other legislation — that is, a regulation will prevail if the standard is not in line with the regulation. It should be ensured that accounting and disclosure norms are brought under one frame and harmonised with the international standards.

(Edited extracts from Directors and Corporate Governance. Book courtesy: Company Law Institute of India Pvt. Ltd. www.cliofindia.com)

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