What is the Role of Government in Ensuring Corporate Governance?

Hardcore advocates of capitalism often argue that Govt. should not

intervene in the functioning of market

Govt. role is very necessary The rules and structures of the market economy are framed by Govt. These are necessary for establishment of trust Too much freedom for economic forces may result in anarchy of production and instability of economy

The Regulatory Role

Govt. may decide when persons or corporations to enter into certain lines of business by way of granting license Govt may regulate the speed of a business activity once they are under way Govt. may control the relationship between various segments of economy to minimize regional imbalances

Promotional Role
When the infrastructural facilities are inadequate or entrepreneurial activities are scarce, Govt. has to assume the promotional role When there is an economic crisis faced by the private corporate, Govt. may act as a banker or takeover it even at a loss Govt. also helps it in crisis by becoming a trustee of the firm

Government Intervention
Market forces alone cannot ensure high rate of investment and growth in output
And hence Govt. intervention is necessary to remove economic rigidity and structural disequilibrium

In the initial phase of development, when huge investment is

necessary, Govt. support is required In a poor or developing country, private entrepreneurs are less, Govt.

mobilizes fund by taxation, borrowing and deficit financing

Govt. intervention is needed to integrate various sectors of economy Govt. intervention also is needed to protect the interest of investors and instilling confidence in them One corporate scandal will cause eroding the faith of shareholders even on honest firms If companies do not adhere to the rules and regulations, Govt. should penalise such companies

Forms of Government Regulation

Regulation of investment, location and expansion of firms by planning

and industrial licensing policy

Regulation of prices of industrial goods by systematic investigation and analysis of cost

Regulation of monopolies and unfair trade practices through legislation

Regulation of wages of employees in private firms to minimize

exploitation
Example for Govt. regulators SEBI, RBI, TRAI, etc.

Corporate Governance in India

In order to improve the transparency and efficiency of corporate governance, Govt. of India had constituted many committee in the past Some of them are The committee headed by Dr. Y V Reddy which recommended The Companies Amendment Act in 2000 Naresh Chandra Committee in 2002 which emphasized the need to have more transparency in auditing and accounting Narayana Murthy Committee in 2003 which also proposed certain measures to promote corporate governance in India

But the breakthrough was made by the committee headed by Kumaramangalam Birla Which had proposed the Clause 49 in the Listing Agreement

The Provisions and Requirements of Clause 49

Composition of Board

non-executive and executive directors must be in 1:1 ratio

(50% each)

Constitution of the Audit Committee

The audit committee should have 3 independent directors

The chairman should have sound financial background A minimum of three meetings should be convened every year

The audit committee Responsible for review of financial performance regularly for appointment of auditors for fixing of remuneration of auditors

Remuneration of Directors
Remuneration of non-executive directors is to be fixed by the board Procedures of Board Board should meet at least 4 times in a year The discussion and analysis report should contain the following Structure of industry and developments Opportunities and threats

Segment wise performance

Risks and concerns and Discussion on financial performance

Shareholders information Quarterly results should be published A report on corporate governance A certificate from auditors on compliance of provisions A minimum of 2 meetings per year of the shareholders grievance committee

Apart from all these acts and regulations from Govt. side, RBI also is putting its own efforts to ensure good governance in the corporate sector by way of demanding transparency in financial transactions, share transfer, etc.

Corporate Initiatives
India has evolved a system and structure of corporate governance It is one of the best among the developing countries The corporate activities like administration of companies, disclosures, shareholders rights, dividend announcements, etc. have been followed properly Major surveys on corporate excellence revealed that Infosys, Hindustan Unilever Ltd. and Wipro are among Asias top

10 corporations
Other corporates which are well governed are ICICI, Ranbaxy, HDFC, Tata group, etc.

Individual Initiatives
In India, veterans like J R D Tata, Mahindra, N R Narayana Murthy, Kumar Mangalam Birla, etc. have shown what is good corporate governace

Initiatives from the side of Dept. of Company Affairs

It has made some recommendations to enhance corporate excellence Provide greater role for non-executive and directors independent

Punishment for executive directors who do not comply with listing requirements Proper disclosures to shareholders Meaningful and transparent accounting and reporting

Corporate Governing Rating

Dept. of company affairs has set up an institute with Information and Credit Rating(ICRA) as the apex body to rate corporate excellence. The institute will be funded from the penalties paid by companies for violating provisions in companies act. In order to evaluate the standard of corporate governance, The following aspects will be considered

Shareholding structure
Governance structure This focus on how effectively the information such as corporate loans, capital expenditure,diversification, etc. are presented to a companys board

Board Structure and process Board size, Proportion of independent directors Expertise they have, Compensation of directors Frequency of board meetings Relations to stakeholders Transparency and Disclosures Financial discipline

Some of the Indian companies that received awards for excellence are Asea Brown Boveri Ltd. Asian Paints Ltd. Bajaj Auto Ltd. Bharat Forge Ltd., etc.

Some Drawbacks that are visible in the Corporate Governance in India

Inadequate sanction and enforcement Power of imposing fines on erring corporate by concerned authorities is not adequate Dept. of company affairs, SEBI and other stock exchanges Lack of Professionalism among the Directors Directors lack motivation in upgrading their knowledge and skills

They become rubber stamp of the promoters or

management

Independent directors are not acting independently

Independence remains only in paper They become puppet in the hands of management They keep mum when mismanagement of funds take place Unlisted investment companies Promotors of many companies started their own unlisted subsidieries

Main company gives loan to these subsidiaries

And they wont pay back These subsidiaries hold major chunk of shares of the main company Malpractice in the Account Show cooked-up accounts

Lack of interest from shareholders side

No dynamism from the shareholders They wont take part in the discussion

They are scattered and unorganised

Voices of dissent are few and rarely recorded Nexus with Auditors Auditors are too obliged They help the management to manipulate accounts Things started improved after taking some firm steps by Institution of Chartered Accountant

Some Signs of Growth for Corporate Governance in India

Competition-driven Due to advent of liberalisation, more companies are coming and competition increases More FDIs are coming

Professionalism is dominating
Old companies are disappearing from scene New companies are giving importance to professionalism Strong Media Financial Institutions are demanding They prefer companies with better corporate governance

Corporate Governance and Globalisation

During 20th century, developing countries adopted protectionist policies Put huge tariff barriers Communication facilities were poor Poor transportation facility

Factors Contributing Globalisation

Falling trade barriers

Free trade agreements Support of WTO, IMF and World Bank

Political reforms

Communist block has been dismantled New countries are coming up for trades Transport and communications facilities have been developed More developing nations started engaging in business Development of technology provides avenues for new products Development of new production process

More Developing nations joining Global Business

Countries like India, China, Singapore, Malaysia, etc. have started global business

Developments in Technology
Developments in technologies such as computer hardware, software, pharmaceuticals, etc. have brought about tremendous transformation in world trade

Transport and Communications

Due to the open air policies, distances have been reduced Movement of people and products has become faster

Faster transport and communication quickened the processes of production

Public Awareness and Scrutiny

Due to the revolution in communication, People have immediate access to information Sophisticated media presentation focuses issues which threaten the public interest or power being abused Demands for better transparency and public accountability in the activities of corporations increased

Technological Challenges and Opportunities

An explosive growth in technology happened in a short span of time Technological innovations have brought in changes in various fields of production, communication and transport

Corporations were forced to adopt successful survival strategies

Social Environment
In order to meet the challenges and opportunities posed by the technological development, the government started allocating more resources for education and training Corporates were forced to adopt a policy of creating job opportunities To sustain economic growth, private sector employment is to be increased Corporates now understand the importance of keeping trust, honesty and transparency which are essential for surviving in a global market

Thanks.