CURRENT CONTEXT OF CORPORATE GOVERNANCE IN INDIA

A Poll conducted on Current Context Of Corporate Governance In India :

The poll involved over 90 respondents comprising CEOs, CFOs, independent directors and similar leaders form the industries like Banking, Insurance Sectors, Manufacturing Construction, Food & beverages

Pharmaceuticals
Communications & Media, Oil & mining ,etc.

What is good corporate governance? Good corporate governance is characterized by a firm commitment and adoption of ethical practices by an organization across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders (including the minority shareholders), in both good and bad times

Clause 49 of the Listing Agreement to the Indian Stock exchange comes into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies.

The existing (Clause 49) and ensuing (The Companies Bill, 2008) legislations do cover the fundamentals of effective corporate governance and India compares favorably with most other developing and Asian economies as far as the adequacy of corporate governance regulations are concerned.
Improved corporate governance, however, does not solely rest on control through increased regulations. What is required is a principle-based approach developed on fundamentals, preventing moral fragility that is enforced through pragmatic levels of regulations.

Many Indian companies operate in a family-owned culture. There has been an implicit assumption amongst boards that senior managers know their job and have the best interests of companies they manage at heart. This has sometimes resulted in boards refraining from asking the difficult questions to senior managers when the company has been performing well or until there is a crisis. The selection of independent directors who are known to promoter directors has further compounded the problem.

From a governance standpoint, boards should address the following key areas specifically concerning independent directors: Adoption of a formal and transparent process for director appointments. The conflict of interest involved in managements appointing independent directors should be tackled through nomination committees (comprising independent directors) for identification of directorial candidates.
Alignment of needs of the company to the skills required in the boardroom.

 Segregation of the roles of CEO and chairman of the board of directors. The chairman of the board should be an independent director who plays a key role in setting the priorities of the board.
Planning for CEO and board succession in different scenarios :

 Formal

evaluation of the CEO and senior management teams performance at least annually.
CEO performance evaluation process should be introduced when the company is performing well. Evaluation of CEO performance sends a clear message that the CEO is accountable to the board and introduces a healthy balance of power.

 Peer evaluation of independent directors should be adopted. This would enable independent directors to openly discuss amongst their group how they are performing and take tangible steps to improve their individual and collective functioning.
Independent directors should take steps to make themselves aware of their rights, responsibilities and liabilities.

In the context of meeting expectations of stakeholders beyond the minority shareholders (eg. employees, customers, vendors etc.) , a number of initiatives need to be embraced such as:
Openness and transparency in dialogue with shareholders. Objective and transparent whistle blower policies that are available to key stakeholders (employees, customers and vendors) and provide adequate safeguards against victimization of whistle blowers.

Have minority shareholders representatives on boards as independent directors

Companies should address the challenges that their audit committees face and focus on enhancing skills in some of the most important areas listed below:
Better understanding of risk, strategy and business models. Understanding implications of the external environment on financial forecasts and performance. Comprehend complex accounting policies and practices how their application impacts results.

Monitoring fraud risk especially relating to senior management override of internal controls

Effective oversight of internal and external auditors.

Ensuring that the boards strategic direction is in the best interest of all including minority shareholders.
Evaluation of audit committee and its members based on an established framework for its functioning.

Independent directors need to spend significant time in understanding the various business operations, companys culture and the impact of these elements on the financial numbers.
The conduct of board meetings needs introspection in terms of frequency and duration, information needs, balance between presentation and discussion, interaction outside the boardroom and most importantly, consultation when in doubt.

 Board chairs should actively monitor how individual directors are proactively identifying and fulfilling their knowledge and competency needs. Independent directors need to conduct various exclusive sessions on a one-on-one basis with management, internal auditors and external auditors.
As part of its annual evaluation process, the board should review the quality of information it receives and consider how it can be improved.

Boards Boards should demand and obtain a holistic view of risks both on and off the balance sheet, their ownership and how they are Mitigated.
Diversity of skills on the board is fundamental to effective risk management. Boards should have a clear understanding with senior management regarding their risk appetite in various areas and help ensure that these are articulated and considered in design of controls, policies and procedures.

 Boards should consider the risks inherent in strategic choices and whether these are acceptable.
Evaluate evolving risks what impact changes to strategy have on the suite of operational, financial and compliance risks and whether this is consistent with the companys risk appetite?

Improving and enforcing Corporate Governance : Factors to improve corporate governance :

improvement in risk management and oversight processes. Enhancing the powers of independent Directors. separation of the position of chairman and CEO.

 strengthening minority shareholders rights.

Remuneration of CEOs should be significantly linked to company performance. Enhance integrity and ethical values within the organization. Striving to ensure that the code of conduct is understood and adhered to by all members of the organization.

The performance management system should recognize and reward ethical behavior.

Extensive background checks should be performed on the senior employees joining the organization..

Companies should screen third parties (customers, vendors, JV partners) with whom it does business for their commitment and adherence to ethical practices.
Chairman of the audit committee should have direct oversight of whistle blower incidents.

 Investors, lenders, analysts should proactively question/challenge management on areas pertaining to corporate governance comprising protecting minority interests, management compensation, government dealings, risk management practices, related party transactions, fraud risk management and CSR.

Monitoring effectiveness of corporate governance: Survey conducted reveals that : 47 percent : effectiveness of corporate governance should be monitored by way of corporate governance audits carried out by corporate governance specialists. 26 percent : monitored by the boards themselves through self-assessment tools

15 percent : monitoring should be by way of investors / minority shareholder groups having access to full information

12 percent : monitoring should be through rating agencies.

Some of the aspects that may require regulatory change:

Board and audit committee evaluations should be mandatory.

Current limits on independent directorships need to be revisited. The CEO and board chair roles should be segregated.

 Stricter penalties for non-compliance.

Transparent CEO evaluation process including disclosure of performance criteria. Role of nomination committees to drive independent director selection process