Corporate governance is the set of processes, customs, policies, laws, and institutions that affect how a corporation is directed, managed, or controlled. Corporate governance also includes the relationships between the many stakeholders involved and the objectives by which the corporation is governed. The main interest groups are shareholders, management and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large.
Corporate governance has become an important both in India and globally. Stakeholder expectations are extremely high, and scrutiny from regulators and investors is incredibly tight. As a consequence, Indian companies are proactively implementing measures for the same. Looking ahead, one of the most important challenges for Board members is to build a foundation of trust with management, the investment community, regulatory agencies and the public. The stakes are high and the margin for error low, and as new standards emerge, one thing is clear: the responsibility for adopting sound governance practices has fallen squarely on corporate directors and officers.
My favorite is one from Harvard Business School. He found that “ethics-based” companies increased their net income by 756 percent, versus just 1 percent of profit-first companies. My message today is that principled economic behavior is a long-term investment in the security of nations. The world cannot afford economic misconduct. Now multinational corporations everywhere to lead the world to the next frontier of globalization, through principled codes of conduct that reinforce the rule of law. Not just the letter of the law, not just minimal compliance with some basic code. But instead something that will really make a difference! Codes of conduct based on principles that respond first to the moral foundations that support all rights. Principle-based codes of conduct that set objective and measurable standards. Principle-based codes of conduct that use independent monitoring and require transparent communication with the public.
Essential Principles of Corporate Governance:
o Discipline in operations
o Transparency in transactions and disclosures
o Responsibility to shareholders
o Responsibility for the action of the company
or Social Responsibility
o Improve group dynamics and harness individual talents
o Improve early warning mechanisms for critical risks
o Mitigate liability exposure
o Build credibility and trust with stakeholders
o Incorporate sustainability as a corporate value
What is the Satyam fiasco all about?
For me, the Satyam case is a typical example of fraud that is extremely difficult to detect and prevent. Satyam’s chairman diligently hatched a plan to defraud his shareholders and gain an advantage for himself.
There is sufficient law to deal with this type of economic crime and corporate governance. In a global environment, principles are important because the rules cannot cover all situations, however, there are the following observations that encourage non-compliance in India:
Companies never take non-compliance seriously as there is a minimal penalty for non-compliance.
Minimum penalty of a few hundred rupees
Most non-compliance offenses can be aggravated by the payment of the fine.
The government department has the appropriate experience or manpower to detect non-compliance.
The prosecutor’s office also does not have the expert who specializes in this type of expertise, hence the majority of offenders cannot be prosecuted.
Lack of political will
Typical Indian attitude that is “chalta hai”
Suggestions:
Strong punishment, that is, life imprisonment for offenders.
There must be a specialized investigation agency and it must be allowed to hire the best professionals.
More power to independent directors and they should be allowed to hire the professional to explain the company’s record/accounts.
Effective and continuous training for all employees
The whistleblowing policy will be mandatory for all companies
The principled conduct of multinational corporations is absolutely essential to planting the seeds of stability and prosperity for all. Multinational corporations account for one third of the world’s Gross Domestic Product and two thirds of world trade. Multinationals can be a powerful influence for good, especially in countries whose governments lack a strong tradition of democracy and the rule of law. Therefore, it is no longer enough for multinational corporations to simply do what is legal. In all cases, multinational corporations must do the right thing, through their conduct, not just their words.
In a speech titled “The Next Frontier of Globalization: Principle-Based Codes of Conduct That Reinforce the Rule of Law,” Parrett told world business and ethics leaders, and representatives of non-governmental organizations (NGOs) and institutions scholars that globalization and world security itself could be in jeopardy unless multinational corporations develop ethical conduct that adheres to values and principles rather than simply to written law.
Indian legislators feel the need to determine the merits of encouraging a principles-based approach (as in the case of the combined code in the UK) to compliance, where the nature, size and complexities of a business govern the compliance and disclosures. rather than a standard rules-based approach to universal compliance (as in the US). Companies in India must have the flexibility to determine those aspects that are practical to comply with and others where they can provide logical and adequate explanations for non-compliance. This will allow them to demonstrate their true intent to comply, where practical, and to make transparent disclosures in other cases.
In India, guidelines for corporate governance are provided in clause 49 of the listing agreement and also in various sections of the Companies Act. Industry experts believe that once appointed, the performance and contributions of these directors should be objectively monitored and evaluated with peer reviews serving as the means of such evaluations. A stronger corporate governance framework is needed to prevent financial fraud like Satyam’s. There is a need to strengthen regulators and corporate laws to improve corporate governance, by the corporate ministry. A new Companies Bill, which is pending in Parliament, would tighten the regulation for auditors. The new bill seeks to revamp archaic laws to help India’s growing corporate sector adopt international best practices and make corporate boards and senior management more accountable.
What needs to be noted is that adequate safeguards are provided in India in the form of various laws, but the stipulated penalty is comparatively low and hence wrongdoers do not fear punishment. Only if the punishments to be meted out are made stricter and act as a deterrent, can it be hoped that such frauds can be brought under control in the future. Furthermore, there is no experience of the enforcement authorities to detect and cure Economic Crimes. It is necessary to create a separate body to examine the issues and implement laws and other provisions to reduce such crimes. There is also a lack of political will to curb such crimes, with politicians taking a lenient view and leaving the investigation and other vital steps in the hands of the CBI, which is not a body created to deal specifically with such white collar crimes. Unless there is reason enough for scoundrels to be afraid of criminal provisions that send a shiver down their spine. Such offenses will continue to occur and we will continue to think of ways to address them.
