Safety net proposed for independent directors

Independent directors may breathe a sigh of relief as the government braces itself to protect them from being held responsible for the

wrong-doing of their company, through a number of proposed changes in the Companies Bill, 2008. The bill, which was introduced in the latter half of 2008 but eventually lapsed, will be re-introduced in the ongoing Parliamentary session.

The ministry of corporate affairs, is willing to introduce further changes to the Bill in respect of the provisions that will guide the performance of independent directors, a move that has been prompted by the large scale resignation of such directors over ambiguity on their role.

The government will set an outline as to what will be an independent directors’ role vis-a-vis his company’s decision-making process. The idea is to safeguard them against any legal action when they are not directly at fault for their company’s wrong-doing.

The Bill, which is set to be sent to the Parliamentary Standing Committee for a review, will look into the need for changes to give greater flexibility to these directors, and will send its proposal to the ministry. The ministry of corporate affairs, will thereafter introduce the changes to the bill before it is made enforceable.

The ministry, which in the Companies Bill 2008, first introduced the concept of independent directors and also made provisions for their mandatory one-third representation on company boards, is mulling changes into the proposed legislation so that such directors can have a defined role to play. Even as independent directors are expected to act in the interest of the company’s ordinary shareholders, the law does not specify the exact nature of their duties.

The ambiguity on the nature of duties of an independent director often leads to situations where they are blamed for all wrong-doings of the company, a government official said, adding that it was necessary to bring clarity to the law so that degree of accountability against those directors can be clearly drawn. The ministry has also invited recommendations from industry bodies such as CII and Ficci, and is considering to incorporate in the new Bill.

CII, for instance, has urged the ministry to clearly define an independent director and bring it in conformity with the definition under clause 49 of the equity listing agreements of stock exchanges.

It has also suggested that the need for appointment of such directors in closely-held public companies and subsidiaries of any public companies should be governed by the materiality and scale of operation of such companies.

Thus, in case of an unlisted public company or a private company, which is subsidiary of a public company, the requirement related to such appointments should only arise if they exceed the prescribed thresholds of size and scale.

Under the proposed changes, these directors can be held responsible only in those circumstances where the company takes a decision wherein they were actively involved. To put in simple words, independent directors may not be asked to serve as an overall watchdog of the company, a notion which the government now sees as overtly ambiguous.

The reason for the change has been a spurt in resignations by independent directors from the board of companies, that followed the Satyam financial scandal wherein such directors on the erstwhile Satyam’s board were blamed for their inaction to safeguard the company’s general interest. The idea is to provide independent directors with a clearly defined way of performance, so that they can not be acted against in case they are directly not at fault.

“We are aware of the fact that it is important to preserve the breed of independent directors by providing them adequate protection. They have an important role to play in good corporate governance,” Minister of Corporate Affairs Salman Khurshid had recently said at a CII seminar, where he met key industry officials.

Source:http://economictimes.indiatimes.com/Economy/Safety-net-proposed-for-directors/articleshow/4770371.cms

Revamp of corporate governance body planned

With a view to promote better corporate governance practices and check frauds, the ministry of corporate affairs has initiated the task of revamping the functioning of the corporate governance body under its aegis, National Foundation for Corporate Governance (NFCG). For this the ministry has appointed Kiran Karnik, former Nasscom president as the new co-vice chairman of the NFCG who has replaced NR Narayana Murthy, chairman and chief Mentor, Infosys.

The ministry is also planning to strengthen its NFCG office by employing more employees to work under its aegis. “For improving the efficiency of operations of the corporate governance body, the ministry is planning to recruit more officers”, said an official.

Corporate affairs minister, Salman Khurshid recently held a meeting with NFCG officials where issues such as the role and responsibilities of auditors and corporate governance were discussed. Apart from this, NFCG is also going to take up the issue of the independent directors and hold a discussion on strengthening their role in the corporate sector. Talking about the need of corporate governance, Salman Khurshid, minister of corporate affairs had earlier said, “The issues related to corporate social responsibility and exclusive growth as an extension of responsible corporate governance is engaging the attention of the ministry, the corporate sector and their stakeholders”. The ministry and industry chamber, Confederation of Indian Industry had set up NFCG in 2004 in partnership with the Institute of Chartered Accountants of India and Institute of Company Secretaries of India in order to improve implementation and enforcement of various laws related to corporate governance. NFCG was set up with a purpose to have better self-regulation in the Indian industry by paying importance to issues related to corporate governance and by providing training and research accordingly.

source:http://www.financialexpress.com/news/revamp-of-corporate-governance-body-planned/487383/#

Corporate governance: A need for fresh perspectives

Over the past six years, Business in the Community’s CR Index has tracked attention by boards to sustainability and corporate responsibility. However, while progress is being made in getting discussions of issues such as climate change and ethical sourcing on to the agenda, BITC and others argue that it is also important to distribute responsibility for these issues across the board rather than relying on one or two individuals.

Executive discussions might even bring in external partners. “It takes enlightened leaderships and part of that is talking to a very broad range of people who monitor what’s happening in an external operating environment,” says Sophia Tickell, executive director of SustainAbility, the consultancy. “Companies need to bring in perspectives that are not necessarily all from inside, where they tend to be focused on the daily running of the business.”

At the same time, for many companies, sustainability is becoming part of daily business – whether that is cutting their energy bills or shoring up ethical sourcing guidelines – and therefore has a variety of implications for the management teams.

“As with any part of the responsible business agenda, we have to be able to explain this in terms of what it means for different business functions,” says David Grayson, head of Cranfield School of Management’s Doughty Centre for Corporate Responsibility. “So for a financial director, this is going to have some different dimensions from a logistics director or marketing director.”

And as companies start to see corporate responsibility not only as a case of simply introducing community investment programmes but also as part of how they operate their supply chains or manage their energy efficiency, a wider group of executives are participating in senior-level discussions.

“There is evidence that sustainability issues are being incorporated into strategy, research and development and other functions that already have strong board representation,” says Ms Tickell.

Nevertheless, for many companies, it remains important to have dedicated corporate responsibility teams with senior officers that report to the board. In a report conducted by Ipsos MORI released in October 2008, BITC found that the percentage of companies with corporate responsibility committees reporting to the board rose from 13 per cent in 2002 to 60 per cent in 2007.

The CR Index also reveals a connection between better performance and the number of individuals on the board with responsibility. For this reason perhaps, recent years have seen the emergence at large companies such as Google, AT&T and SAP of a new C-level position – the CSO or corporate sustainability officer.

Moreover, what is discussed at board meetings is changing. BITC found that in the past year, nine out of 10 companies participating in the CR Index had board-level discussions of sufficient depth to merit inclusion in the minutes, and the number of board members with responsibility for specific aspects of corporate responsibility has increased.

This activity is likely to intensify. “One of the consequences of the crises – financial, economic and in the long-term more severe sustainability crises in terms of water and climate change – is that these demand an improvement in governance,” says Prof Grayson.

Board-level engagement in corporate responsibility allows companies to manage these issues more strategically and to set standards and values and measure performance against targets. It also helps companies to look outward as well as inward, providing impetus for efforts to improve regulation in their sector.

And having an individual on the board with an overview of sustainability strategy can help advance sustainability strategies. An enlightened corporate responsibility officer can, for example, play an important convening role, bringing issues to the attention of the board and explaining their significance to the business.

“That person can play a very key role in enhancing the agenda and helping the board to understand it,” says Ms Tickell. “Because there’s no guarantee that the average board member is necessarily on top of these issues, they need someone to explain them and justify why they’re being addressed in this particular way.”

Companies also need to prevent corporate responsibility from becoming locked into an executive suite silo. “If that’s the case, everything tends to get diluted,” says Ms Tickell. “And it’s not looked at as a genuine threat and opportunity for the business.”

The opportunities look promising at a time when profit margins are under pressure. In its research with Ipsos MORI, BITC revealed that companies consistently participating in the CR Index outperformed their FTSE 350 peers on total shareholder return between 2002 and 2007 by between 3.2 per cent and 7.7 per cent a year.

However, to reap these business benefits, companies need to ensure employees throughout the organisation are aware of the need to improve performance in areas such as ethical sourcing and carbon reduction, says Prof Grayson.

“Leadership from the top is essential,” he says. “You need the top-down messages – but you also need an empowered workforce from which innovation and ideas can bubble up. It’s not a case of ‘either, or’, the genius is getting both.”
source: http://www.ft.com/cms/s/b992d6d4-548d-11de-a58d-00144feabdc0.html

Sustaining Investor Confidence: CD seminar on corporate governance

As the opening session on a series of discussions on corporate governance, it was only appropriate that it that focus on the most effective framework needed for organisational decision making. KMPG CEO Russell Parera said that what was needed was a culture that encouraged debate and dissent, something one doesn’t always see on Indian boards as people tend to belong to the same inner circle.

Following up on that, Zia Mody, managing partner, AZB Partners added that if a person was on the board of a company as an independent director, he or she was expected to ask awkward questions, which rarely was the case. “However, that in itself cannot help prevent a fraud as directors could be given wrong information,” she added. Of course, it takes a lot more than just having standards in place. It’s also about how these are implemented. It would, for instance, be almost pointless to have a whistleblower policy in place, and link it directly with the CFO. The panel agreed that it was best to give authority to an independent director or board member when it came to matters of compliance and governance.

Lakshminarayana KR, chief strategy officer, Wipro added that a lot also depended on how much time the board members had, to devote to each company on whose board they served, and the amount of access provided by the company to the mid and lower level of employees so that directors could truly get a sense of what was happening. Joseph Massey, MD & CEO of the Multi Commodity Exchange had a relevant point to make. “Corporate governance has to be treated as a normal part of life when running a company-it’s just one more add-on.

The focus should be on running the business, corporate governance just gets inculcated,” he said. While shareholder activism in India has still to take off, this is partly also because companies are shielded from the reputational risk that class action lawsuits bring with them. Parera mentioned that as companies would increasingly grow aware of this, shareholder activism too would rise in a healthy way. As the session ended, all the panellists agreed that there was no such thing as too much disclosure and while no one wanted more regulation in the wake of the Satyam scandal, what was needed was better implementation of existing regulations.

Issues in the implementation of the Corporate Governance Code

The moderator - Ganesh Ramamurthy, director, governance risk and compliance services, KPMG India, set the ball for the second session rolling, by establishing that while the corporate governance norms in India are at par with the best in the world, ensuring that these norms are always implemented is where the trouble comes in. Commenting on the difficulty of implementing these norms, Stephen Matthias, partner, Kochhar & Co said that it was important to have all the corporate governance codes together to ensure better implementation rather than have the implementation governed by multiple bodies.

source:http://economictimes.indiatimes.com/Features/Corporate-Dossier/Seminar-on-Corporate-Governance-/articleshow/4591408.cms

Independent director, anyone?

Corporate governance has been the buzzword ever since the Satyam fraud came to light in January. Companies, consultants and regulators have waxed eloquent about this concept, but now they face a serious issue: Independent directors are leaving in droves. So what is to be done?

Directorsdatabase.com, a joint venture of Prime Database and Bombay Stock Exchange, reports that 265 independent directors have quit 211 company boards since January. This mass exodus has spooked the market regulator, the Securities and Exchange Board of India (Sebi), which has now sought counsel from one of its advisory panels.
This is a thorny issue, one compounded by last month’s controversy surrounding investment banker Nimesh Kampani. Andhra Pradesh authorities have charged Kampani for the failure of Nagarjuna Finance, a company on whose board he served as an independent director, to pay back depositors. In most business circles, this charge is now being seen as a travesty. True or false, the charge has rejuvenated the question about independent directors, although from a different angle.
Satyam showed independent directors, who knew nothing or did nothing about the company’s fraud, in negative light, and provoked a media and public backlash against such directors. The scandal prompted an important question for regulators: Are the rules and regulations governing directors too lax? Kampani’s story prompts the opposite question: Are some rules too harsh?

Regulators will have to think through these questions. While independent directors can’t be held liable for matters that don’t reach the company’s board, holding them accountable for issues under the board’s purview is fair game. A recent Prime Database report noted that 75% of independent directors are the promoters’ relatives or friends.

This makes mockery of Sebi’s 2005 Clause 49 that underscored corporate governance, and later mandated that independent directors comprise as much as 50% of a board.
But this doesn’t mean such directors are useless. The Satyam scandal may have exposed flaws, but its recovery has shown that decent hands at its helm, à la Kiran Karnik and Deepak Parekh, can make a real difference.

source:http://www.livemint.com/2009/05/27213010/Independent-director-anyone.html?h=B

Unified approach needed from cos, regulators on governance: KPMG

With corporate governance practices of Indian companies coming under scanner, global consultancy KPMG believes industry bodies such as Nasscom, CII and regulators such as SEBI should have a more unified approach for developing benchmarks in go od governance practices.

“The industry bodies such as CII, Nasscom and regulators such as SEBI should look at a more unified approach towards handling corporate mis-governance and at developing benchmarks in good governance practices,” KPMG Director (Governance Risk and Complian ce Services), Mr Ganesh Ramamurthy said.

According to a survey of KPMG on the state of corporate governance in India, majority of respondents believe that while corporate governance should be practiced through principle-based standards and moderate regulations, there is a need for stronger regu latory review and exemplary enforcement.

The survey said that Indian companies believe that the spirit and practice of governance regulations and practices need to be intertwined.

One of the key concerns related to corporate governance is risk management, with nearly three-fourth survey respondents saying these practices need to be improved.

“Indian companies have some way to go when it comes to risk management measures. Also important to consider is impact of changes to strategies and priorities on risk profile,” Mr Ramamurthy said. - PTI

source:http://www.thehindubusinessline.com/blnus/14121713.htm

A case study on Satyam

Hopping jets, raising money for school, advising political leaders across the world, teaching courses, working with government agencies, writing books and articles, rubbing shoulders with corporate captains on boards, suggesting to students practical marriage strategies, and more…

Living a whole new life, after a quintuple bypass surgery (‘five for the price of one’), Bala V. Balachandran, Founder and Hon Dean of Great Lakes Institute of Management, Chennai (www.greatlakes.edu.in), is in no mood to slow down. “The more and more you think a job is a joy and not a job, five years or ten years become yesterday or five minutes,” begins Bala, when we meet on the eve of the big day when his ‘new green campus’ -- located in Manamai Village, Mamallapuram -- was to be inaugurated.

“Now that it is clear that the American model has problems, where do we go for solutions,” he demands? The answer can be from Indian education and moral leadership, Bala hopes.

Excerpts from the interview.

On academia included in corporate boards.

There are a few things that professors who act as independent directors can ensure. First, why should financial statements be discussed at short notice? Why not we insist that sufficient time be devoted, prior to the exercise – say, ten days?

Second, why should we not take an active role in educating the senior management, without taking a fee? Because, if you take a fee, and it is exorbitant, then there is a question of independence-impairment.

Thus, we need standards for independent directors. Also, we should be proactive, knowing that we have a fiduciary responsibility, despite not being privy to day-in-day-out activities.

I also don’t understand how somebody can be a director in twenty companies, while continuing as a full-time employee at some other place, or as an entrepreneur. You cannot do that. Such a director could be hurting. You don’t need a Sarbanes-Oxley Act or Clause 49 to tell you this. When I see a list of twenty board memberships, I wonder if he or she is taking a rubber-stamp position.

On the Indian Institute of Corporate Affairs, the new school.

Working along with the Ministry of Corporate Affairs, we want to ensure that this new school takes as students, people with entrepreneurial talent from the rural poor, gives them all the academic and practical inputs to make them a Dhirubhai Ambani or Ratan Tata.

On a case study about Satyam.

The Union Minister for Corporate Affairs, Mr Prem Chand Gupta, and I are writing a case study, making a story of Satyam and Enron combined, and it will discuss the questions of fraud, corporate governance and so on. Deadline for the case is May 31. For the first time, a public servant, a Minister, is suddenly interested in coming up with a case to challenge the Harvard cases; it is great for this country.

Enron took two-and-a-half years to three years to go around. In the case of Satyam, the Government created a fantastic board with Deepak Parekh and others, and made sure the company could be sold to Tech Mahindra. Nowhere in the world have we seen such a swift action, resolving things in less than six months.

There is a general feeling that public servants are not so smart. I think they are smarter than some of the private entrepreneurs.

source: http://www.hindu.com/thehindu/holnus/006200904300931.htm

Relevance of IT and Software Asset Management in Corporate Governance

Corporate Governance is about principles, processes, systems and accountabilities that influence how business corporations take decisions, allocate resources/returns, execute responsibilities and undertake risk management, whether financial or otherwise, with an objective of protecting and promoting the interest of the shareholders, management, board of directors and the employees.

When we talk of accountabilities, risk management and allocation of resources from a corporate governance point of view, management of software as an asset and having a control on other IT and security related issues within an organization becomes relevant. Since the need for Software is all pervasive to any organization using computers to run its operations and that software distribution and usage is licensed (open or proprietary) and protected under IPR laws, IT governance becomes one of the integral parts of Corporate Governance.

Therefore, we can say that IT Governance is a framework for the organizational management to adopt industry standards and ethical practices to ensure a healthy, secure, productive and compliant IT infrastructure (both hardware and software), which enables an organization to achieve its business goals and objectives.

Businesses of all sizes benefit financially from IT governance. Research shows that:
• Businesses are 20 percent more profitable than similar firms with poorer governance.
• Investors pay 14 to 22 percent more for well-run, well governed companies.
• Top-rated corporate governance companies consistently return more than triple the profits to investors than that of lower-rated companies over 3, 5, and 10 years.

The Key to Successful Corporate Social Responsibility in India

Corporate social responsibility is a topic of keen discourse around the world and India is no exception. However, it appears to us that prevalent CSR practices – the organization of blood donation camps, to cite just one example -- are symptomatic of a failure of corporate governance.

It is a sign of bad corporate governance when managers donate to causes that their companies are in no way better positioned to address than individuals are.

As trustees of corporate assets, are managers not exceeding their brief when they divert resources in this fashion and pursue personal passions with corporate resources?

Would it not be better to distribute profits among the shareholders and employees and leave it to their discretion, as individuals, to contribute to the causes that they deem fit?

Again, CSR is sometimes treated as being no different from image building. But such an approach is short-sighted and therefore not good corporate governance.

"Hypocritical window-dressing" – to use the famous phrase coined by Milton Friedman -- of this kind is soon found out and has not been shown to be very effective for image building.

But when the "CSR strategy" of a company gets merged with its competitive strategy so as to become indistinguishable from it, it is a sign of good corporate governance taking shape. There is no more a need for CSR as a stand-alone activity.

source: http://online.wsj.com/article/SB124019930116534151.html

CII announces new corporate governance code

Concerned over corporate governance issues post-Satyam fiasco, industry body Confederation of Indian Industry (CII) on Friday announced the formulation of new corporate governance code for corporate sector to bring more transparency and better governance.

Chairman of CII special task force Naresh Chandra, while announcing the corporate governance norms, said that large and heavily publicised corporate frauds often provoke legislative and regulatory action, Satyam being the latest example.
However, for preventing such scandals, laws should be better managed and strengthened rather than imposing further regulations, he said while speaking at the annual summit of the industry body.

“The code would assist companies to take a voluntary step beyond the stated letter of law,” he said.

Present on the occasion, J J Irani, director Tata Sons, said that independent directors need to work with the management to prevent such happenings. Also, third party auditors can also play an important role in probing such frauds.
The companies should strengthen their corporate governance and separate the role of chief executive officer and chairman, which will bring in greater transparency, he said, adding that the internal audit system of the company should be made robust and as independent as possible.

source: http://www.livemint.com/

The fundamentals of corporate governance

The Satyam issue is a good opportunity to harvest rich insights into the fundamentals of corporate governance. In discussions on governance, one question that doesn’t normally get the attention it merits is: on whose behalf is the company governed? Whose company is it, really?

The top-of-the-mind response is that a company is governed on behalf of the shareholders.

The course of events at Satyam throws up enough doubts about this answer. First, there has been such a massive dumping of shares and change of ownership, that only a small percentage of those who held Satyam shares in November are shareholders today.

Second, it would be incorrect to think the government appointed an independent board only to protect the interests of shareholders, most of whom have bought shares relatively recently at a throw-away price.

Among the various stakeholders of any company, the shareholders tend to be the least loyal — selling their holdings at the first sign of trouble. It would be more appropriate to view shareholders as suppliers of money and liquidity rather than as owners. It is clear that the company is not governed only for the benefit of the shareholders.

Is the company then governed on behalf of the employees? Protecting the jobs and interests of the 53,000 employees at Satyam was clearly one driver for the quick government intervention.

However, providing employment cannot be the primary purpose of any organisation. As an example, suppose half of Satyam’s customers decide to cancel their contracts, will the Satyam board still continue employing all the staff?

So the company is not governed on behalf of its employees. How about the customers? Satyam has an impressive roster of international customers. The need to continue servicing large international clients as well as protect India’s IT reputation must have played a role in the government’s decision to act fast. Just as with employees, it is possible to build a case that a company does not exist purely for the benefit of the customers.

Whose company is it then? One view that has taken root of late is the concept of a stakeholder — a term encompassing the shareholders, customers, employees, suppliers and the society at large. It could be argued that the company is governed on behalf of all stakeholders.

While this idea holds some appeal, it fails on two counts. First, what happens if the interests of various stakeholders are in conflict? Second, there is a constant churn of shareholders, employees, customers and suppliers.

The nature of the company’s business constantly changes —requiring new employees as well as servicing new customers. When the composition of stakeholders is constantly evolving, how do the ‘governors’ actually decide the best interest of each of these stakeholders?

The only idea that appeals to me is that the company does not really belong to anyone. You govern the company for the company’s own benefit. This is justified based on a pure statutory position that the company is a distinct legal entity, independent of any shareholder or any other stakeholder (a principle established by the House of Lords in the famous case of Solomon vs Solomon & Company in 1897).

Arie de Geus in his book The Living Company takes this idea further. He is of the view that the only powerful way of looking at a company is as a ‘living organism’, an organism with its own destiny much the same as any living person.

The role of governance, then, is one of stewarding the company to achieve its full potential. This is quite similar to a parent guiding and shaping his or her children to be the best they can be in their chosen field of endeavour.

Borrowing these powerful ideas, the answer to the question ‘Whose company is it anyway’ is: no one’s. A company is a unique and distinct individual with its own DNA and destiny. The role of governance, according to me, is three-fold:
l Ensuring the long-term health and viability of the company;
l Stewarding the company to fulfil its potential and to become as great as it can be; and
l Adherence to the highest standards of ethics, statutory compliance and social responsibility

Governments function effectively by distributing power. Most evolved democracies distribute power between the legislature, the executive and the judiciary. Further, an independent press (the fourth estate) is critical to keep these institutions honest and functioning effectively. While this may impair speed and efficiency, it seems to be the most effective mechanism for running countries thus far.

So what are the parallels to corporate governance? In the case of Satyam, there was an undue concentration of power with the founders, disproportionate to their low shareholding. The board was far less independent than required.

The core issue, clearly, is balance of power. While individual leadership is a key ingredient of success, visionary leaders know how to enrol a larger team, not just within the company but also in the form of independent board members and advisors, to distribute power and empower their companies to grow independent of themselves.

They understand institutions can be built only if they become more important than their leaders. How then do we achieve balance of power within a corporate context? I see a clear parallel between the pillars of government — the legislature, executive and judiciary — and their corporate equivalents for good governance.

The board of the company is, in effect, the legislature. The board’s primary responsibility is to steward the company to achieve its full potential. While, in theory, the board is elected by the shareholders, its job goes beyond catering to only the shareholders. The board balances the needs of the shareholders, employees, customers, vendors and partners, and society at large.

This is similar to our expectation of an elected representative, say an MP. While the MP may have been elected from a specific constituency and a specific party, his responsibility goes beyond those constituencies to the country as a whole. Just as the legislature makes laws to govern a country and its people, the board lays down policies that govern the way the company is run.

The management of the company is obviously the executive branch, similar in role and function to that arm of the government. Working under the broad policy, vision and direction of the board, the management team is accountable for meeting the mutually agreed upon goals and objectives, in line with the ethics and values of the company.

While the legislature has a more broad-based structure ideal for policy making, the management team has to be more hierarchical and result-focused to ensure efficient execution. It is this separation that helps a company cater to the larger good while retaining execution disciplines.

The role of the judiciary is to interpret the laws laid down by the legislature and apply them to specific disputes. Currently this function is discharged by the board itself on internal company issues, and by the regulatory bodies and the courts when they relate to the laws of the land.

As an example, if the company has disputes relating to income tax, the appellate authorities and the tribunals form the first level of judiciary, with the high courts and Supreme Court stepping in if the issues cannot be resolved.

In my view, the judicial role of the board is not as well-developed and is often at the root of many corporate governance failures. One possible approach is to strengthen the corporate governance committee and ensure its charter includes a systematic review of company performance on all fronts across stakeholders.

Given the size and complexities of today’s corporations, it may even be worthwhile, under the relevant legislation, to turn over the judicial role of the board to another body — the judicial board.

The governance committee can play the role of an independent press by taking a proactive approach in seeking stakeholder feedback, facilitated by external agencies. This goes beyond the whistleblower policies envisaged by today’s governance guidelines.

The Satyam episode has allowed us to look at the fundamental aspects of corporate governance: on whose behalf the company is governed, and how we can distribute power to ensure the longevity and effectiveness of the institution.

source:http://economictimes.indiatimes.com/Opinion/The-fundamentals-of-corporate-governance/articleshow/4269150.cms

ICSI panel to work on corporate governance norms

The Institute of Company Secretaries of India (ICSI) has formed a seven-member committee to look into ways to strengthen corporate governance norms in the aftermath of the Satyam scandal.

The ICSI Council, in its recent meeting, deliberated the matter in detail and constituted a core group consisting seven members to go into the issues arising out of the Satyam episode and suggest steps to strengthen the governance framework amongst corporates as well as changes in the legal policy framework regulating the corporates and professionals," its president Datla Hanumanta Raju said.

ICSI has also been assisting the government in its investigation into the Satyam scam and has sought answers from the scam-hit IT major's company secretary, asking him to furnish details related to adherence of corporate governance norms. "We have received a report from the company, but have sought more details," Raju said. ICSI had asked Satyam's company secretary to furnish the company's balance sheet
, annual report and corporate governance reports for the last few years.

ICSI's core group would look into a host of issues related to corporate governance compliance. "The primary area being looked into would be related to disclosure and transparency made in terms of board processes and agenda papers. Also, the core group would look into the role of independent directors and how they can be an effective tool against such frauds," ICSI CEO NK Jain said. Related-party transactions would also be an area on which the ICSI core group would deliberate, he added.

"The idea is to identify inherent weakness in the system and suggest ways to plug loopholes," he said. ICSI has also been training independent directors on how they should act as effective checks against any malpractice in a company. "This is certainly our core area. ICSI has already trained directors of LIC who are on the boards of various companies. Also, we are doing a similar program for directors of PNB

source: http://timesofindia.indiatimes.com

Post-Satyam, SEBI calls for better corporate governance

The financial market regulator Thursday said corporate India had to be more transparent with shareholders and ensure corporate governance in the post Satyam scenario

“Two actions which are being regarded by SEBI are: to require all listed companies to obtain peer audit done, and in case of pledging of promoter shareholding, to make this price sensitive information available to all other shareholders,” said Securities and Exchange Board of India (SEBI) chairman C.B. Bhave here.

"We have to recognise that the issue of corporate governance is a journey, which has to be constantly examined and continuous efforts are necessary to make it fruitful," he said.

Bhave was speaking at a conference on corporate governance organised by the Confederation of Indian Industry (CII) in association with the ministry of corporate affairs and the National Foundation for Corporate Governance.

He said that after the revelation of the Satyam fraud, SEBI was actively considering introducing rules to ensure more rigorous audit and disclosures, such as having external agencies to conduct internet audit and rotational auditors.

He said SEBI could also consider a "whistleblower policy", under which employees of a company can report any wrongdoing to the firm's whistleblower committee without informing their supervisors or revealing their identities.

source: http://economictimes.indiatimes.com/

Chinks in corporate governance

The full story of Satyam is yet to emerge and if past corporate failures are anything to go by, it will take some time before it does. What is already clear is that it has raised many questions about corporate governance in India—the role of boards, of independent directors, of the auditors, of investors and of analysts. Many are suggesting that this is indicative of weak corporate governance standards in India and a failure to protect minority investors.

We should be cautious before we rush to conclusions about what needs to be done. On the other side of the world, the US is going through its own corporate governance crisis in the form of the Madoff scandal. Corporate governance in financial institutions in the US, the UK and continental Europe is coming under serious scrutiny. Countries with very different types of corporate governance systems, laws for protecting minority investors and different patterns of ownership of companies are facing similar crises of confidence.

Furthermore, this comes after an extensive tightening of corporate governance standards in the US in the face of the Enron and WorldCom scandals. The Sarbanes-Oxley Act was supposed to have plugged the loopholes in accounting and governance standards that previously existed. Many thought that it went too far and undermined the competitive position of the US.

The decline in foreign listings on the US stock exchanges was attributed to the unduly onerous regulatory standards that Sarbanes-Oxley imposed. Irrespective of whether this is correct, the legislation has not prevented major failures from occurring in financial institutions across the US.

The board of directors is frequently regarded as being central to good governance, and the role of the board has featured prominently in discussions about Satyam. The board is the body charged with having oversight of the operations of the firm and setting its strategy. The board should ensure that the company is upholding high standards of probity and conduct, and provide a probing analysis of the activities of management.

In particular, non-executive directors are supposed to give an independent assessment of the quality of management. But time and time again, failures of corporate governance suggest that they do not.

There are several reasons.

First, it is difficult to appoint truly independent directors. This is particularly hard to achieve in countries such as India where family ownership is widespread and there is a close-knit group of corporate leaders. Even in countries where family ownership is less prevalent, such as the UK, there are serious doubts about the independence of directors.

Further, it is unclear whether independence is a good thing. In terms of providing oversight of the activities of management it might be, but non-executive directors are supposed to perform an equally important function in guiding and advising management. They bring a degree of expertise from other companies, industries and countries that would not otherwise exist in the firm. In many cases, they are appointed to support rather than question and criticize management.

It is difficult for non-executive directors to perform a scrutiny objective at the best of times, but it is particularly difficult to do so when faced with a dominant chief executive who expects support not criticism from the company’s board. To some extent, the dominance of the chief executive can be moderated by appointing an independent chairman and ensuring a separation of functions between the two individuals.

Many countries have sought to separate the roles of chairman and CEO. However, it can inhibit firms from implementing effective strategies, especially in companies operating with new technologies, such as Indian information technology firms, that require visionary strategies. In any event, separation (sometimes with independent deputy chairmen as well as chairmen) has not prevented some of the most prominent failures of financial institutions over the past few months.

Can the role of the board be strengthened? The answer is yes. Tighter rules regarding the appointment and rotation of independent directors can be introduced. There can be rules relating to the credentials, experience and training of members of the board. The requirements on members of the board to provide oversight can be clarified.

Reporting by the independent members to external investors can be strengthened and attention can be given to the remuneration and incentives of non-executive as well as executive directors.

All of this is important. But will it solve the problem? The answer is almost certainly not. Many countries have played around with these rules to limited effect. Boards are a focus of much discussion about corporate governance, but they are not a solution. Effective corporate governance requires the direct involvement of investors, and attention is increasingly being focused on shareholder activism as an alternative to a reliance on boards.

source: www.livemint.com

The myth of corporate governance

Dr Bala V. Balachandran, J.L. Kellogg Distinguished Professor of Accounting, Information Management and Decision Sciences, and Founder and Honorary Dean, Great Lakes Institute of Management, Chennai, is an independent director on the boards of several Indian companies. Two years ago, at one of India’s leading companies (the good professor prefers not to name it) on which Balachandran is an independent director, an acquisition strategy was being discussed. The company had begun intense negotiations and had put in an offer, only to be pipped by a competitor who came in from the cold with a higher price. The discussion at the board meeting revolved around whether a renewed offer needed to be made. The directors were veering around to the view that yes, they should go for the kill. Balachandran thought otherwise. “I put my foot down and said no. I told them that it was time to back off as shareholder wealth would suffer if we went ahead,” he said. The board listened and didn’t pursue the deal. With hindsight, stepping back proved to be the right decision. For, as the Kellogg professor points out: “The company that finally did manage to win is today stuck with it (the acquisition).”

Cut to Berjis Desai, Managing Partner at Mumbai-based law firm J. Sagar Associates, who is on the boards of at least six listed companies. Three-to-four years ago, he along with other directors shot down a diversification plan of a capital goods company, even though the promoters were keen on going ahead. The company, he says, had a poor track record of managing a diversified business. Desai, however, admits that very few independent directors make an attempt to short-circuit proposals or decisions of promoter directors.

Indeed, independent directors who stand up against a board or management are as rare as hen’s teeth. After Satyam’s outrageous boardroom antics last fortnight (see Satyam’s Six Deadly Sins, page 38), the B. Ramalinga Raju-promoted company has become everybody’s favourite whipping boy. But fact is that the IT services major isn’t the only Indian company that has given corporate governance the five-fingered salute. The Satyam episode is shocking because of the sheer brazenness of the promoters. But you have to wonder: Are some of the world’s most renowned and most respected minds, who are independent directors mere stooges, used to push through proposals that promoters and managements are keen on?

Rubbish, says a section of independent directors. “People don’t treat independent directors like ornamental pieces. For every Satyam kind of event, there would be 100 other instances where directors asserted themselves and their views were well respected by the board,” says Shailesh Haribhakti, Managing Partner, Haribhakti and Associates, who is also an independent director on the boards of 14 companies, including ACC, Future Capital Holdings and Pantaloon Retail (India).

To be fair to independent directors, there have been instances when they’ve taken extreme action. Recently, a high-profile head of a private equity firm resigned from the board of a Mumbai-based midtier e-governance company. Reason? Commitments made to him by the promoters were not fulfilled; one of them included the appointment of a professional CEO, which never took place even after two years. Moreover, some aggressive plans, which included big contracts from the government, were not in the interest of the company as they involved huge capital expenditure; the director was not in favour of this due to financial constraints of the company.

Indeed, such active participation of independent directors is the need of the hour at a time when some of the biggest names of India Inc. are in a mood to walk the grey line. In a recent report, titled Risks to Valuation?, foreign brokerage house CLSA highlighted some “permitted but not best practices” of Indian companies (see Walking the Thin Line).

But, how much can independent director really do? Prithvi Haldea, Chairman & MD, Prime Database, says: “Independent directors can’t be expected to be the masters of business. They are not clued into the business.” Haldea sits on the board of Nucleus Software, a midtier IT company. “Our role is to protect the interest of minority shareholders in whatever decisions are taken by the management or the board,” he adds. Pradip Shah, Chairman, IndFund Advisors, who sits on the boards of 12 companies, feels there are few options for independent directors if managements don’t take them seriously. “If management continues to ignore (your voice), the only option for an independent director is to step down. You can’t expect them to be panacea for all ills,” says Shah, a market veteran. In the past, he along with other directors defeated the attempt of an MNC to transfer assets to an unlisted company.

There have been boards that have rejected potentially valuedestroying moves. Recently, for instance, the Gujarat government suggested that all PSUs in the state should donate 30 per cent of their profits before tax as charity! The shareholders of at least one company, Gujarat Alkalies & Chemicals, where the government has a 36.7 stake, defeated the proposal. However, another state-owned firm, Gujarat Mineral Development Corp., could do little as the government held 74 per cent in it. But that didn’t prevent shareholders at the company’s annual general meeting (AGM) from raising Cain, which resulted in the AGM being postponed. Several fund managers and institutional investors have made informal requests to the government and the management of these companies to drop the proposal.

As the Satyam case has revealed, active investors can often be more effective than independent directors in persuading managements to change their minds (see Cry Freedom!, page 11). Yet, that’s hardly a case for independent directors to abdicate their roles. “They (independent directors) should constantly monitor their ability to devote essential time so as to be able to discharge their onerous responsibilities. If they can’t, then they should not be on the board,” says V.V. Ranganathan, a former senior partner of Ernst & Young. Recently, he resigned from the board of Zee News as independent director as he didn’t think he would be able to devote enough time to this role in 2009.

P.K. Vijay, MD, Corporate Professionals, an advisory firm relating to corporate governance, suggests regulators (like Department of Company Affairs and SEBI) form a pool of directors; and it’s from this pool that companies should choose directors rather than selecting on their own. Now, that’s some food for thought at the next seminar on corporate governance

source:

http://businesstoday.digitaltoday.in /content_mail.php?option=com_content&name=print&id= 9524

Corporate governance... what’s that?

EVERY so often, it takes one isolated instance of misdemeanour to spark off renewed demands for improved corporate governance. The need is felt more acutely in times of slowing demand; when the going is good, caution–and, indeed, good corporate governance – is thrown to the winds. Everybody swims along with the tide, and the whistle blowers are branded society’s curmudgeons.

The whole corporate governance issue is popping its head up again after the pandemonium over the sordid Satyam-Maytas business. Much has been written, debated and blogged over the proposed $1.6-billion merger between the two companies, but you can bet your last last dollar that the last word has not been spoken yet. The government in Delhi, the regulators in Mumbai, the shareholders in New York have all jumped in and expect some more fireworks over the next few weeks.

The initial public outburst was caused by news that listed company Satyam Computer Services was using its free cash – which belongs to all its shareholders — to buy out two unlisted infrastructure and property development companies, both owned by the managing shareholders of Satyam. These companies were ostensibly incurring losses and the buyout would have given them a fresh lease of life. The deal had to be subsequently jettisoned as shareholder fury shaved off over 30% of the share price in India and over 50% in the ADR values in New York. Chastened by the loss to the shareholders, the company then announced a buyback. Even this is being seen as weird – using company cash once again to prop up share prices when other options could have been examined.

But, all this has refocused attention on what constitutes proper corporate governance. One of the issues raised is the role of independent directors and whether they can be held accountable in decisions like these. Market regulator Securities and Exchanges Board of India has been pressing companies to increase the number of independent directors on their boards who will, presumably, represent the interests of the minority shareholders. In the Satyam-Maytas muddle, fingers have also been pointed at some of the independent directors, eminent professionals in their own right, who unanimously approved the deal.

So, does the mere fact of having a certain percentage of the board as independent directors really help? In USA, it was found that many CEOs were getting their pals and cronies appointed as “independent” directors and using them to get their pay packets and bonuses inflated. Who monitors whether the word “independent” truly stands for what it is supposed to denote? It is difficult to really prove that a person is truly independent, unless his actions prove otherwise.

Sebi has been trying hard to get public sector units, which are listed on the stock exchanges, to appoint at least 50% of the board as independent directors. This has led to enormous complications, including the debate whether in the case of a breach, Sebi had the powers to penalise a PSU company, which can be considered as an arm of the government. The situation could also extend to the bizarre. Take the case of steel maker SAIL, which now has about 22 members on its board. Or, the case of ONGC which has 17 members, comprising six executive directors (besides the CMD), two government nominees and eight independent directors

There is a similar farce playing out in the public sector banks. Vadodara-based Senior Citizens Service Trust has filed a public interest litigation (PIL) in the Gujarat high court over the way 37 “independent” directors have been appointed to the boards of various PSU banks, of which 33 owe their allegiance to the Congress party. The independent directors are supposed to act as custodians of the public money deposited with the banks and ensure that it is not all frittered away through dubious loans.

Another area that’s crying out for some vigilance by its directors is the mutual fund industry. The recent crisis in the mutual fund industry – especially, as a result of the spree in launching fixed maturity plans — should force Sebi to begin reviewing the role of trustees in the three-layered mutual fund industry. Many experts believe that trustees in an asset management company are somewhat like independent directors in companies and should truly live up to their role of safeguarding investor interest.

The point is this: none of the trustees was asking questions when the funds were busy launching one FMP after another. In many other companies, directors looked the other way while managements were busy massaging valuations with fictitious data. Today, they are trying to court indignant shareholders and convince cash-flush banks that they run bankable businesses. But no one’s biting yet.

Source:http://economictimes.indiatimes.com

Corporate Governance

Reliance-ADAG group claims to have highest standards on corporate governance. If I am able to recall properly during the fighting with his elder brother Anil Ambani alleged that his elder brother doesn’t adhere to high standard of corporate governance. Now it seems to be that it was only a tactic of Anil Ambani to extract money from Mukesh Ambani. Anil Ambani is back on his own tract of cheating government and public to fill his coffers.Now its up to us if we can trust any of the claims made by Anil Ambani?