Corporate governance is a set of procedures, rules, policies and practices followed by the Corporates considering the interest of various stakeholders so that the affairs are managed in fair and transparent manner. Over the years, it has been seen that Corporates with better Corporate Governance has excelled and created distinct Brand Equity in the eyes of public and whereas the Corporates with poor governance has lost value, faith and Brand Equity.
In today’s world, Corporate Governance plays an important role as it not only creates value for the Corporates at domestic level but also across the globe. It is also important for the economy of the Country since failure of Companies due to Corporate Governance issues also affects the Economy and Image of the Country. Corporate Governance is one of the essential factor for long term sustainability of a Corporate.
In this article authors have analysed the lessons to be learn by Indian Corporates due to Corporate Governance failure.
“Strong corporate governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”
Report of Kumar Mangalam Birla Committee
on Corporate Governance constituted by SEBI (1999)
Recently many large Indian Corporates such as, Jet Airways (India) Limited, Interglobe Aviation Limited (Indigo), Dewan Housing Finance Corporation Limited (DHFL), Punjab and Maharashtra Co-operative Bank Limited, Yes Bank Limited, CG Power and Industrial Solutions Limited and several others were impacted due to Corporate Governance failure.
WHY CORPORATE GOVERNANCE?
1. A good Corporate Governance ensures corporates long term sustainability and success.
2. It helps to achieve economic growth.
3. A good corporate governance increases investors’ confidence in the Company.
4. Society having greater expectations from corporate, they expect that corporates take care of the environment, pollution, quality of goods and services, sustainable development etc. code to conduct corporate is important to fulfil all these expectations.
5. The huge flow of international capital in Indian companies are also affecting the management of Indian Corporates which require a code of corporate conduct.
6. It helps in brand formation and development.
7. A good Corporate Governance helps in enhancing enterprise valuation.
8. It ensures organization in managed in a manner that fits in the best interests of all the stakeholders.
9. It reduces risk of corporate crisis and scandals.
JOURNEY OF CORPORATE GOVERNANCE IN INDIA:
In 1996, Confederation of Indian Industry (CII) took a special initiative on Corporate Governance – The first institution initiative in Indian Industry.
The initiative by CII was mainly to address public concerns, to protect small investors and their interest, to promote transparency, to align with international standards in terms of disclosure by the corporate sector and to develop public confidence on the business of the Corporates.
Further, various circumstances and developments happened in the wake of misuse of lacunae in laws, scams, frauds and other wrong doings by the management of the Corporates. The Corporate Governance has strengthened over the years as mentioned below:
| Year | Event |
| 1992 | Government constituted Securities and Exchange Board of India (SEBI) for regulating the securities market |
| 1998 | Confederation of Indian Industry (CII) released “Desirable Corporate Governance – A Code” on Corporate Governance |
| 1999 | Kumar Mangalam Birla Committee was set up to improve Corporate Governance Standards |
| 2000 |
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| 2002 |
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| 2004 | MCA constituted a Committee under the Chairmanship of Dr. J.J. Irani, Director, Tata Sons to recommend and advise on the revisions to the Companies Act 1956 considering changes in the national and international scenario and to further simplify the Companies Act as per international best practices |
| 2009 | CII set-up a Task Force under the Chairmanship of Naresh Chandra to recommend ways of further improving corporate governance standards and Practices both in letter and spirit for listed companies. The Task Force submitted recommendation for voluntary adoption by listed companies and wholly owned subsidiaries of listed companies. |
| 2013 | Companies Act 2013 was notified which repealed five decade old Companies Act 1956 and introduced various Corporate Governance provisions viz. Appointment of Independent Directors, Women Directors, Key Managerial Personnel, CSR, Constitution of various committees, Secretarial Audit, Related party transactions, etc. |
| 2015 |
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| 2017 |
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| 2018 |
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| 2019 |
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KEY PILLARS OF GOOD CORPORATE GOVERNANCE[1]:
Effective Corporate Structure: Build simple and transparent processes driven business structure considering needs of all the stakeholders.
Relationship with Stakeholders: Communicate frequently with stakeholders, including clients, investors, shareholders and stock markets.
Fairness and excellence: Be objective and ethical, and deliver the best to earn trust and respect from our stakeholders.
Integrity and transparency: Ensure transparency and maintain a high level of integrity.
The Board as Trustee: Safeguard the shareholder’s capital as trustee, and not as its owner.
Compliances: Satisfy both the spirit and the letter of the law in all our actions and disclosures.
Responsible leadership: Lead by example by ensuring independence of the Board and effectiveness of the Management.
CORPORATE GOVERNANCE OF INDIAN CORPORATES:
Good Corporate Governance practices cannot guarantee success of an Organisation. However, non-adherence of Corporate Governance norms may lead to collapse of corporate due to sudden events like decline in revenue, loss of net worth, inability to repay debt and business thereby affecting the long term sustainability of the Organisation.
On the other hand, good Corporate Governance practices not only creates wealth of its stakeholders but also helps in long term growth of the Organisation which boosts investors confidence and well being of the nation.
Corporate Governance failures does not occur overnight. There are several warning signs which a company must take note of early in order to avoid such failures.
GOVERNANCE ISSUES FACED BY THE COMPANIES WHICH EVENTUALLY LEAD TO CORPORATE GOVERNANCE FAILURES – WAY FORWARD.
| Sr. no | Governance issues faced by the Companies |
| 1. | Accountability:
Accountability is necessary for effective corporate governance. The Company shall identify a specific individual in respect of each business division of the Company who shall be held accountable and answerable in case of any wrong doing. |
| 2. | Related Party Transaction:
When the member of Board or Management has some conflict of interest in a particular transaction then the same shall be brought to the notice of the Board or Management prior to entering in to the transaction and such interested member shall not participate in voting for approval of such transaction. Conflict of interest shall be avoided to ensure that such transaction are at Arm’s Length. Top management of the organisation should focus on well being of all the stakeholders and not only on personal wealth creation. |
| 3. | Accuracy:
Inaccurate reporting of financial information can seriously affect the company’s image, value and brand equity. Further, the Stakeholders lose trust and confidence in the management of the Company. |
| 4. | Errors and omission:
The errors and omission by the Company may lead to unnecessary regulatory fines and penalties. The management shall put adequate systems in place to avoid errors and omissions. |
| 5. | Unethical practices:
The board or management of the Company shall take ethical decisions in the best interest of the Company. Unethical practices leads to loss of business, revenue and customers thereby affecting the long run sustainability of the Company. |
| 6. | Violation of code on Corporate Governance:
Adherence of code on Corporate Governance will ensure better management of the Company, enhance brand equity and a better place to work for. Any deviation from code on Corporate Governance will make Company vulnerable to losing market value, fines, penalties, etc. |
| 7. | Dereliction in duty of Independent Directors:
The word “Independent” itself means not dependent. It means that a person shall take independent decisions without any bias. The purpose of appointment of independent directors under Companies Act, 2013 was mainly to act as watchdog for the assets of the Company and to detect and prevent frauds . Any negligence on the part of Independent Directors while performing their duties may have serious ramification on the performance of the Company. In a promoter led board is often at the danger of creating a invertebrate Board and the independent director has to often toe the line of the promoter – chairperson. Independent Directors should function their roles and responsibility with due care and without any fear will help Companies to identify risk at early stage and to take appropriate actions in order to avoid Corporate Governance failure. |
INDIAN CORPORATES – FAILURE OF CORPORATE GOVERNANCE:
A couple of examples of corporate governance failures which forced businesses and government authorities to rethink their stance on corporate governance:
1. JET AIRWAYS (INDIA) LIMITED (‘JET AIRWAYS’)[2]:
| Background: |
| Jet Airways was one of the largest airlines in India, Headquartered in Mumbai. Mr. Naresh Goyal is the Founder of Jet Airways. |
| What Happened? |
|
| Reasons for failure: |
|
2. DEWAN HOUSING FINANCE CORPORATION LIMITED (‘DHFL’)[3]:
| Background: |
| Dewan Housing Finance Corporation Limited is a leading housing finance company, headquartered in Mumbai. Mr. Rajesh Kumar Wadhawan is the Founder of DHFL. |
| What Happened? |
|
| Reasons for failure: |
|
3. YES BANK LIMITED (‘YES BANK’)[4]:
| Background: |
| Yes Bank Limited is an Indian private sector bank, founded by Rana Kapoor and Ashok Kapur in 2004. Yes Bank is India’s fourth largest private sector bank and is a high quality, customer centric and service driven Bank. |
| What Happened? |
|
| Reasons for failure: |
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4. INTERGLOBE AVIATION LIMITED (‘INDIGO’)[5]
| Background: |
| Interglobe Aviation Limited is one of the largest Indian Airline Company, founded by Rakesh Gangwal and Rahu Bhatia. |
| What Happened? |
|
| Reasons for failure: |
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GOOD V/S WEAK CORPORATE GOVERNANCE – KEY TAKEAWAYS AND DRAWING LESSONS FROM INDIAN CORPORATES:
While the governance framework shall be in compliance with applicable laws and regulation as a minimum, the management of the Corporate shall always endeavour to include all the best procedures and policies over and above mentioned in the law for ensuring better corporate governance practices.
| Takeways from good Corporate Governance of Indian Corporates | Patterns in Governance Failures and Drawing Lessons |
| 1. Built a strong, qualified board of directors and evaluate performance:
– Board should be comprised of directors who are knowledgeable and have expertise relevant to the business. – Qualification, competency, strong ethics, integrity, diversity, skill sets and adequate time to commit duties shall be the key factors for selection of Board members. How to build board? – The majority of the directors should be independent. – Train and educate new Directors to familiarize them with the business, their duties and the Board’s expectations; – Reserve time in Board meetings for on-going education about the business and governance matters. – Review of Board mandates to assess whether Directors are fulfilling their duties, and undertake meaningful evaluations of their performance. |
1. To differentiate between Owners versus controllers:
– It is the prime responsibility of the Board of Directors of the Company to act as the trustee and to take care of the value of the stakeholders. – Board of Directors of the Company are in fiduciary relationship with the Company. – Board of Directors are the controllers of the Company. – On the other hand investors are the Owners of the Company. – There should be clear differentiation between Owners and controllers in order to have good Corporate Governance. |
| 2. Define clear roles and responsibilities:
– Establish clear lines of accountability among the Board, Chair, Chief Executive Officer, Chief Financial Officer, Executive Officers and management. – Transferring certain responsibilities to a sub-group of directors. – Typical committees include: Audit, Nomination, Compensation, Remuneration and Corporate Governance Committees and “special committees” formed under Companies Act, 2013 and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 as amended from time to time (SEBI LODR 2015). – Defining clearly the role of the Board and each committee setting out their duties and accountabilities. |
2. Ethical intention :
– Majority of the frauds or poor Corporate Governance of the Indian Corporates are due to unethical intention of the top management of the Company. – Instead of creating or focusing on the personal wealth creation, top management to see long term benefit of the organisation and the economy in which it operates. – Broader perspective of the organisation benefit in an ethical manner will result in to long term sustainability of the Corporate.
|
| 3. Emphasize integrity and ethical dealing:
– The Directors must not only declare any conflict of interest but they shall also refrain from voting on interested matters. They shall maintain integrity in business dealing with respect and compliance with laws and policies How to create and cultivate culture? – Adopting a policy on conflict of interest, a code of business conduct and a Whistleblower policy. – Make designated person responsible for oversight and management of these policies and procedures. |
3. Strong Corporate Governance Policy and its implementation:
– Corporate should have a strong Corporate Governance Policy which clearly defines policies, procedures, accountability etc. – Further, it is essential to implement effective Corporate Governance Policy and regularly monitor the same. – Many large companies have failed due to lacuna in Corporate Governance Policy or failure to implement the same. |
| 4. Evaluate performance and make principled compensation decisions:
– Do not create an appearance of conflict in a director’s independence or discharge of his duties. – Establish measurable performance targets for executive officers (including the CEO) – Assessing and evaluating regularly their performance against them and tie compensation to performance. – Constitution of Compensation Committee comprised of independent directors for developing and implementing compensation plans of executives. |
4. Digital Solution:
– Digitisation will enable to access enterprise information from anywhere in the world thereby easy detection of reputational, legal and security risks. – The Board has an equal stake to put together a mechanism that proactively identifies and scrutinises unpredicted risks even though the strategy, internal audit, risk and quality groups have their stakes in monitoring and improving governance. – Setting of a digital governance model: creation of a flexible system to maintain accountability, roles and decision making for all the digital initiatives, taking into consideration regulatory, legal, compliance and market risks. – Creating a governance delivery structure:
|
| 5. Engage in effective risk management:
Identifying and assessing the risks faced by Companies, including operational, financial, environmental, reputational and legal risks. |
5. Usage of Technology in Corporate Governance:
Technology is heart of today’s modern corporate world. Indian Corporates may use technology for ensuring following Compliances: – E-board meetings – Board evaluations – Voting and resolutions – Compliance management solutions – Electronic board portals and management systems – Protection of unpublished price-sensitive information |
CORPORATE GOVERNANCE SCORECARD – FOR INDIA A BOMBAY STOCK EXCHANGE (BSE) – INTERNATIONAL FINANCIAL CORPORATION (IFC) INITIAVE[6]:
Listed companies in India are required to comply with the Corporate Governance requirements as specified in the Companies Act, 2013 and SEBI LODR 2015.
Some corporates have taken extra efforts to go beyond what is required in the statute and have been more than compliant on the Corporate Governance Requirements.
However, there is no comprehensive tool through which status of Corporate Governance can be measured. In the absence of a comprehensive tool, it is very difficult for Corporates and they are not in a position to self-assess the status of their Corporate Governance and benchmark vis-a-vis other companies nor do the investors have any easy to understand methodology which provides the status of Corporate Governance of a Corporate.
In order to address these issues, BSE has collaborated with the International Finance Corporation (IFC) Washington, a member of the World Bank Group for developing a “CG Scorecard” for Indian corporates as an initiative for the public good. The CG Scorecard will enable companies to benchmark themselves and understand the status of their Corporate Governance as well as provide investors necessary information to understand the status of the Corporate Governance of any company. In this regard, it was also decided to obtain the professional and expert services of Institutional Investors Advisory Services (IiAS), a leading proxy advisory firm in India to frame a questionnaire under the guidance of IFC and BSE.
The CG Scorecard is developed on the basis of four Organisation for Economic Co-operation and Development principles for Corporate Governance namely:
- Enforcing rights and Equitable treatment of shareholders
- Role of Stakeholders
- Disclosures and Transparency
- Responsibilities of the Board
CONCLUSION: Corporate Governance is considered as an important means for paying heed to investors’ grievances. A strong Corporate Governance not only increases stakeholder’s value, but also boosts investors’ confidence which in turn helps corporates to have long term sustainability in competitive economy. In last few years, many Indian Corporates are failed due to poor compliance culture and serious violation of statutory and regulatory guidelines on Corporate Governance.
A good Corporate Governance is one which is in addition to what has been prescribed under law. The Indian Corporates should adopt Corporate Governance practices in accordance with global standards to set best standards of Corporate Governance in the industry rather than only complying measures prescribed by law which will entail long term sustainability and growth of an organisations.
“The new decade has brought with it a host of new challenges. One of the foremost challenges is to improve corporate governance standards. The key driver of good corporate governance is transparency and disclosures in corporate reporting.
Due to failure of Indian Corporates, it is a wake up call to increase Corporate Governance Standards and a strong implementation of the same by Indian Corporates.
In this upcoming age of turbulence only those who are transparent will survive”
Dr Madhav Mehra, President, World Council for Corporate Governance, UK.
Notes:
[1] Reference: Annual Report of Infosys Limited for the F.Y 2018-19.
[2] References
1. jetairways.com
2. https://www.marketingmind.in/5-reasons-that-led-jet-airways-to-shut-its-operations/
[3] References:
1. dhfl.com
2. https://www.icofp.org/blog/failure-corporate-governance-dhfl-perspective/
[4] References:
1. yesbank.in
2. http://simsree.org/blog/corporate-governance-issues-yes-bank-explained/
[5] References:
1. goindigo.in
2. https://moneylife.in/article/indigo-co-founder-rakesh-gangwal-seeks-sebi-intervention-on-corporate-governance-issues/57642.html
[6] Reference: https:www.bseindia.com
(Author CA Unnati Shah -Email: csunnatishah@gmail.com and CS Kapil Sanghvi- Email: kapil4sanghvi@gmail.com)
Author Bio
Interesting article.
Very interesting…. None of ADAG companies were mentioned nor Videocon Group just to name a few…. The failure of these two represents the real bad side of Promoter driven businesses in India where Auditors, Independent Directors even Regulatory Agencies cant stand upto well connected Promoters …..