The contours of corporate governance get pronounced from all meetings of big, medium or small industrial forum. Some of them claim its success while some others portray it as a villain. But corporate governance has, however, come to occupy a prominent position and the time has come to compare its strength in U.S.A., its origin with India, the newly accepted emerging market with projection to grow wildly ensuring good investment values.
However, legal enforcement by SEBI and other regulators have enhanced its position among Indian corporates. Now that Companies Act 2013 with further fortification with timely amendments, has made it as an inevitable regulatory of SEBI and others, corporate governance got a new lease of life with Indian Institute of Corporate Affairs compiling a list of current independent directors, conducting an online test to certify them and enlist a separate list for women who want to serve as an independent director, time is not ripe to explain any more the concept of corporate governance but compare it with American situation which boldly unearthed the concept and enforced with timely modification as the crisis in 2008 or otherwise evolved to unsettle the process.
Let me compare corporate governance (CG) in both the countries with authentic research done by FICCI, to start with in India.
True to its eminence and no non sense approach, FICCI, the legend of Indian Industrial groups conducted a survey and interviews, during September 2015 to January 2016, collected 150 responses from Directors, CEOs, CFOs, legal counsels and others, supplemented by in-depth interviews to know from the actual persons who implement corporate governance and how they feel about the concept or its effectiveness.
The following was the point of reference for this survey or interviews on CG: Quoted from survey directly.
Detailed questions were raised during the survey which took place among the following composure of industries:
To capture the extent of change in different companies, those surveyed were categorized into the following three groups:
– unlisted companies;
– small listed companies (with annual turnover up to Rs 500 crore) and
– large listed companies (with annual turnover above Rs 500 crore)
Post reforms, what are the areas of development to put it rank wise.
The response of participants was as under:
|Rank||Great extent||Not at all (%)|
|1. Improvement in financial and non-financial disclosures||95%||5%|
|2.Transparency in decision making and dealings||87.5%||12.5%|
|3. Effectiveness of independent Directors||92.5%||7.5%|
|4. Effectiveness of the Board in discharge of its responsibilities||95%||5.0%|
|5. Investors’ rights and influence in decision making||75%||25%|
|6. Improved assessments of related party transactions||67.5%||32.5%|
|7. Greater participation of various stakeholders in governance process||82.5%||17.5%|
The first category also includes those who felt some growth has really taken place though they may not give full credit.
What are the challenges the companies face on account of regulatory regime?
A valid question which when posed to companies of all hues, their responses were varied and quite revealing.
Again, the survey made the task simple by ranking them.
1. Threat of regulatory action by enforcement agencies- 82.5% some- what/very much felt it
2. Assuring adequacy and effectiveness of internal financial control – 97.5% some- what/very much felt it.
3. Focus on compliance distracts from strategic and business functions – 90.0% some- what/very much felt it.
4. Restrictive approach of independent directors due to their greater role, responsibilities and liability- 70.0% some- what/very much felt it
5. Class action suits by shareholders/ depositors- 55% some- what/very much felt it
6. Oversight by other shareholders in related party transactions- 67.5% some- what/very much felt it.
The following observations were also made by those who were surveyed bearing relevance to the issues involved.
The survey analysed industry’s response to question on four broad themes. Those surveyed comprised of C-level executives, independent directors, company secretaries and general counsels of companies. The respondents belonged to public listed companies (63.3%), private limited companies (18.3%) and public limited companies (18.3%).
Board and its Functions: Is the Indian Board Effective and Independent?
With imposition of systematic duties codification, directors feel more involved in big companies. Board’s effectiveness therefore shows an increasing trend. They have shown more involvement in financial statement matters. Compliance matters attract more attention.
While large companies could engage quite competent independent directors, one or more, smaller ones feel the burden of lack of interest from the same category of directors due to lack of offer suitable incentives, remuneration or offer of results linked rewards.
Input of diversified talents among independent directors from various stream like seasoned professionals, talented woman director or senior retired executives have added additional importance to the Board in discharge of its duties, evaluation of Board or its members by independent directors devoid of its involvement and vice versa, are new developments. Yes, diversity has added luster to the Board composition.
Well run large listed companies welcome the formation of audit committee and even large public sector banks which hardly felt the necessity of highly talented auditors as necessity are being questioned by the regulatory authorities who saw the recent fraud transactions in public/private sector financial institutions as lack of involvement of audit committee or lack of its independence as the root cause.
Let us look at the recommendations of the survey which may throw some new light in view of the reforms ushered in by the new Companies Act, 2013.
The following were the earnest request of those who were interviewed:
Reforms are process in go but never rest on any finite conclusions. Yesterday’s darling of investors, namely, General Electric, languishes for want of investor support at $9.00 per share in New York Stock exchange.
The reaction of Indian companies did not disappoint a puritan auditor or a regulator since given a chance, we would jump back to 1940s but is it feasible? Some of our giant Indian corporates not only function abroad but adopt GAAP or IFRS standards, some of the most difficult regulatory steps. But they rule the world too.
Let me transfer your attention to Corporate governance in U.S.A., though my recent article on inside trading in USA in taxguru.in did mention some progress on the same.
This time, let us revel with the observations of Harvard Law School Forum on Corporate Governance through its Business Roundtable Publication. The relevant web site is as under:
Top American corporates meet under the forum of Business Roundtable and decide on Corporate Governance principles in view of changing horizon of its application at various parts of the globe where they have a role to play.
During their meet in 2012, they kept their faith with the following guiding principles:
Business Roundtable supports the following core guiding principles:
1. The board approves corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct.
2. Several corporate scandals resulting in loss of share holder value, investigation by regulatory authorities and complete loss of faith from investing public/financial institutions/suppliers or highly talented employees have made the Board to set the tone at the top, one that would be based on ethical principles accepted over the ages.
3. Management develops and implements corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation. Unfortunately, the recent failure of Boeing airplanes and their faulty Corporate Governance principles made American companies to have a relook at their operations.
4. Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition and results of operations and makes the timely disclosures investors need to know to assess their investment needs.
5. The audit committee of the board retains and manages the relationship with an outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and also oversees the company’s risk management and compliance programs. Having majority of independent directors to guide the audit committee and select proper firms to manage the audit has been an uphill task, particularly after the frequent failure of top auditing firms in U.S.A.
6. The nominating/corporate governance committee of the board plays a leadership role in shaping the corporate governance of the company, striving to build a diverse board whose composition with persons of impeccable character and caliber, would guide in selecting proper persons for future leadership role and smoothen the succession planning easy. Unfortunately, less easily said than done. Baring a few corporates, most of the others struggle to get proper talent to guide the corporates.
7. The compensation committee of the board develops an executive compensation philosophy based on performance, result oriented compensation, allowing proper bonus and other compensation that will allow the top management to produce long term value creation strategy for the company.
8. The board and management should continue to engage with long-term shareholders on issues of long-term interest to them and disclose appropriate information for their benefit and also make them give appropriate cooperation for the smooth functioning of the company. By ethical behavior and creation of proper culture, successful management and Board glide the company smoothly.
9. Successful investors recognize that Board develops both short term and long-term goals for smooth sailing of the company yielding considerable value for their investments in the long run and adequately compensate with suitable dividend/repurchase of shares or bonus issues at opportune time.
10. In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does operate to do a successful long-term business.
With the arrival of China and its economic might, many of the set corporate governance principles have undergone vast changes. With flight of capital becoming easy, countries tightening their regulatory principles to safeguard national/investor interests and keen competing countries to get investments, the Corporate Governance has undertaken a new vision and urgency to meet the needs of investing public.
However, American regulators have meticulously guarded Sarbanes Oxley Act, 2002 which was enacted and passed after the housing bubble of U.S.A. Whatever we talk of CG, its credit flows through Sox, as they call it.
Having gone through lots of material to understand and compare contrasting Corporate Governance principles in two of the most cherished democracies, namely, India and U.S.A., it is time to really verify the application of Corporate Governance in two of the most respected and long surviving Corporates, one each from these countries.
How does Hindustan Unilever (HU) meet the consistent title of the most respected ethical corporate in India and never landed in any illegal disputes with its regulators? Its balance sheet may provide some (BS) clues.
Over to the said BS for 2018-2019.
Page 57 proudly quotes its Founding member of the company, respected, Mr. William Hesketh Lever, as under:
“CORPORATE GOVERNANCE “I believe that nothing can be greater than a business, however small it may be, that is governed by conscience; and that nothing can be meaner or more petty than a business, however large, governed without honesty and without brotherhood. – William Hesketh Lever”
The proof of pudding is in eating. Let me write a few sentences from its famed BS. Not many knew that we used to read the BS from this company to learn better English, CG, and ethics when they were only taught in very good business schools in my days of 1970-1980. Kindly permit me to quote from the web site of HU.
“The Directors of the Company are appointed/re-appointed by the Board on the recommendations of the Nomination and Remuneration Committee and approval of the Members at the General Meetings.
The Company’s Audit Committee comprises Mr. Aditya Narayan as the Chairman and Mr. S. Ramadorai, Mr. O. P. Bhatt, Dr. Sanjiv Misra and Mr. Leo Puri, Independent Directors of the Company as members of the Committee.
The Audit Committee of the Company is entrusted with the responsibility to supervise the Company’s internal controls and financial reporting process and, inter alia, performs the following functions:
overseeing the Company’s financial reporting process and disclosure of financial information to ensure that the financial statements are correct, sufficient and credible;
The list goes on and pages 57-66 reveal the secret of its success as an ethical corporate citizen and why still an average CA/CS/CMA or a MBA from a good school is goaded to go through HU BS as a source book of ethics.
Let our attention go back to U.S.A. corporate citizen, Colgate Palmolive, maker of Colgate tooth pastes and a host of other customer products known from time immemorial.
Extracts from Corporate Governance has been shown separately for easy reference or as a social responsibility. (24 pages in toto)
Let us make some mental notes of its composition of Audit Committee, the pivotal center of any modern corporate citizen, the names of other committees that subsist the operations of the company and other titbits to make us wiser.
1. Audit Committee
2. Stakeholders’ Relationship Committee
3. Corporate Social Responsibility Committee
4. Risk Management Committee
5. Nomination and Remuneration Committee.
|Sr. No.||Dates of Audit Committee|
|1||May 21, 2018|
|2||July 26, 2018|
|3||October 29, 2018|
|4||January 24, 2019|
Audit committee consisted of 6 independent directors fulfilling the requirements of SEBI and other regulatory requirements.
One can read its 14 pages coverage of CG for knowledge and to make an investment decision.
With the sudden collapse of investment sentiments, coupled with massive reduction of share values and other calamitous economic situation in the world, it is time for one to review the share/bond or other investment portfolio. But how does one do it without knowing the latest developments in Corporate Governance principles enacted in India or U.S.A. the harbinger of democratic living. Yes, one is expected to read the financial statements, understand them and all the more, how corporates interpreted them to have ethical values which constitute long term investors net worth for years to come.
Yes, it is time for you to act.