Narendar Pani

Corporate governance redefined

Narendar Pani | Updated on April 06, 2011 Published on February 03, 2011

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An effective system of corporate governance would have to move beyond shareholder interests to consider the entire value system the company operates in.

Discussions on corporate governance are often marked by a touch of defeatism. This is not entirely surprising when companies with as widespread a reputation for corporate governance as Satyam turn out to be the centres of massive scams. It is easy then to settle into a belief that corporate malpractice is inevitable. But before we reach such despondency, we need to ask ourselves whether the lack of progress is simply because we have approached the issue from the wrong direction. Could an alternative approach which provides greater space for the ethical beliefs of Indian companies and a stakeholder-driven mechanism to implement governance have provided better results?

Corporate governance has both an ethical and a legal dimension to it. Ideally, the ethical dimension will set out the rules and once a broad consensus has been achieved the legal system will ensure that the few wrong-doers will be punished. It is just possible, though, that we may have got this sequence reversed. Typically, once a scam is uncovered, there is a righteous demand for fresh legislation. Since there is little time or inclination at those times to find out the ethical norms that a vast majority of Indian companies would be comfortable with, there is a tendency for the law to be put together by cherry picking international practices.

This would not be such a bad thing if the governance structure of Indian companies was the same as in the developed world. But western companies, more often than not, tend to be run by independent professional managers, while they are owned by shareholders. Enforcing effective corporate governance is then primarily a matter of ensuring the managements protect the interests of all shareholders.

BEYOND SHAREHOLDERS

Indian companies, however, tend to be promoter-controlled. Transferring western norms would no doubt protect the interests of non-promoter shareholders. To the extent that these interests differ from those of the promoters, this is an important safeguard.

But this model does nothing to prevent corporate malpractice that benefits all shareholders. There was a time when a major company would issue non-convertible debentures with the specific understanding among investors that they would later become convertible. While that particular practice was stopped, there are a number of other less-than-ethical practices that are used today to prop up stock prices. And non-promoter shareholders may well be as keen as the promoters to keep share prices artificially high.

A model that is preoccupied with shareholders can also be insensitive to wrong-doing at the cost of other stakeholders. Malpractices that hurt customers, the environment, labour or other stakeholders could benefit all shareholders. Small shareholders with their eye on the price of their shares may be more than willing to look the other way when their company violates, say, environmental norms, especially in a regime where it is possible to get away with such violations.

CONSENSUS ON VALUES

A more effective system of corporate governance in India would then have to move beyond shareholder interests to consider the entire value system the company operates in. Arriving at a consensus among corporate houses on what this value system should be is not easy. Indian companies are often dominated by families. These families come from a diverse set of cultures, each with their own ideas of what is an ethically acceptable practice.

But it may be possible to make progress with less ambitious targets. Companies may be willing to set out a code on corporate governance issues that are hurting them. After the Radia tapes, companies may be willing to spell out what they believe should be the role of lobbyists. If a consensus on this narrow issue is not possible, individual companies should be able to state what their values are.

We would then be able to take the important, if still small, step of seeing whether companies function according to the value systems they profess. Over time, it may even be possible to arrive at a set of norms for corporate governance that are shared by most Indian companies. A law based on these norms would have a much greater chance of being followed.

It is quite possible that the norms that companies offer will only reflect the views of the controlling shareholders. It is then important that while eliciting the views of companies, efforts are made to also take on board other stakeholders. One mechanism to do so would be to introduce independent stakeholder directors on the board.

INDEPENDENT DIRECTORS

An independent director focusing on issues concerned with the environment, for instance, could help the company explore means of environment- friendly growth. Even if such means prove more expensive in the short run, they would minimise the risk of ignoring norms and suddenly facing dramatic threats, such as closure.

For such a mechanism of independent stakeholder directors to work there would have to be great credibility over both their independence as well as their competence to protect the interests of particular stakeholders. Their credibility in terms of their ability to protect the interests of stakeholders, with minimum damage to the company, could be guaranteed through mechanisms similar to those used by auditors. And their independence could be assured by their being paid by an external agency. For instance, if the National Stock Exchange could charge a corporate governance fee from companies listed on it, it would be able to meet the salaries, and evaluate the work, of independent stakeholder directors.

It is only when the appropriate ethical system that Indian companies accept is first identified, and the mechanisms put in place to ensure this ethical system takes into account the interests of all stakeholders, can we hope to take the debate on corporate governance from the realm of righteousness to that of realism.

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Published on February 03, 2011
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