History, Evolution, Development and Emergence of Corporate Governance
In this article, we are going to discuss the main origin of corporate Governance i.e. History, Evolution, Development, and Emergence of Corporate Governance.
History, Evolution, Development, and Emergence of Corporate Governance
Developments in India
- The concept of good governance is very old in India dating back to the third century B.C. when Chanakya (Vazir of Parliputra) elaborated fourfold duties of a king, viz. Raksha, Vriddhi, Palana, and Yogakshema.
- Substituting the king of the State with the Company CEO or Board of Directors, the principles of Corporate Governance refer to protecting shareholders’ wealth (Raksha), enhancing the wealth by proper utilization of assets (Vriddhi), maintenance of wealth through profitable ventures (Palana) and above all safeguarding the interests of the shareholders (Yogakshema or safeguard).
- Corporate Governance was not on the agenda of Indian Companies until the early 1990s and no one would find much reference to this subject in books of law till then.
- In India, weaknesses in the system such as undesirable stock market practices, boards of directors without adequate fiduciary responsibilities, poor disclosure practices, lack of transparency, and chronic capitalism were all crying for reforms and improved governance.
- The fiscal crisis of 1991 and the resulting need to approach the IMF induced the Government to adopt reformative actions for economic stabilization through liberalization.
- The momentum gathered albeit slowly once the economy was pushed open and the liberalization process got initiated in the early 1990s.
- As a part of the liberalization process, in 1999 the Government amended the Companies Act, 1956.
- Further amendments followed subsequently in the year 2000, 2002, and 2003.
- A variety of measures have been adopted including the strengthening of certain shareholder rights (e.g. postal balloting on key issues), the empowering of SEBI (e.g. to prosecute the defaulting companies, increased sanctions for directors who do not fulfill their responsibilities, limits on the number of directorships, changes in reporting and the requirement that a ‘small shareholders nominee’ be appointed on the Board of companies with a paid-up capital of Rs. 5 crores or more).
- History, Evolution, Development and Emergence of Corporate Governance
Desirable Corporate Governance Code – A Code by CII
- The Confederation of Indian Industry (CII) is an association of Indian businesses which work to create an environment conducive to the growth of the industry in the country.
- CII is a non-governmental, not-for-profit, industry-lead and industry-managed organization, playing a proactive role in India’s development process.
- Founded in 1895, CII has over 7200 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 1,00,000.
- CII works closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness, and business opportunities for industry through a range of specialized services and strategic global linkages.
- It has 64 offices, including 9 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries.
- History, Evolution, Development and Emergence of Corporate Governance
History of Desirable Corporate Governance – A Code by CII
- In 1996, CII took a special initiative on Corporate Governance – the first institutional initiative in Indian industry.
- The objective was to develop and promote a code for Corporate Governance to be adopted in corporate entities – The Private Sector, the Public Sector, Banks, and Financial Institutions.
- This initiative by CII flowed from public concerns regarding the protection of investor interest, especially the small investor; the promotion of transparency within business and industry; the need to move towards international standards in terms of disclosure of information by the corporate sector, and, through all of this, to develop a high level of public confidence in business and industry.
HISTORY & EMERGENCE OF CORPORATE GOVERNANCE
- A National Task Force set up with Mr. Rahul Bajaj , Past President ,CII and Chairman & Managing Director, Bajaj Auto Limited, as the Chairman included membership from industry, the legal profession, media and academia.
- This Task Force presented the draft guidelines and the code of Corporate Governance in April 1997 at the National Conference and Annual Session of CII.
- This draft was then publicly debated in workshops and Seminars and a number of suggestions were received for the consideration of the Task Force.
- Reviewing, these suggestions, the Task Force finalised the Desirable Corporate Governance Code.
Evolution and Development of Corporate Governance
-
The Code – Recommendations
1)There is no need to adopt the German system of two-tier boards to ensure desirable corporate governance. A single board, if it performs well, can maximize long-term shareholder value just as well as a two- or multi-tiered board. Equally, there is nothing to suggest that a two-tier board, per se, is the panacea to all corporate problems.
2) Any listed companies with a turnover of Rs.100 crores and above should have professionally competent, independent, non-executive directors, who should constitute:
- at least 30 percent of the board, if the Chairman of the company is a non-executive director, or
- at least 50 percent of the board, if the Chairman and Managing Director is the same person.
3) No single person should hold directorships in more than 10 listed companies.
4) For non-executive directors to play a material role in corporate decision making and maximising long term shareholder value, they need to:
- become active participants in boards, not passive advisors;
- have clearly defined responsibilities within the board such as the Audit Committee; and
- know how to read a balance sheet, profit and loss account, cash flow statements and financial ratios and have some knowledge of various company laws.
5) To secure better effort from non-executive directors, companies should:
- Pay a commission over and above the sitting fees for the use of the professional inputs;
- Consider offering stock options, so as to relate rewards to performance.
6) While re-appointing members of the board, companies should give the attendance record of the concerned directors. If a director has not been present (absent with or without leave) for 50 percent or more meetings, then this should be explicitly stated in the resolution that is put to vote. As a general practice, one should not re-appoint any director who has not had the time to attend even half of the meetings.
7) Key information that must be reported to, and placed before, the board must contain:
- Annual operating plans and budgets;
- Quarterly results for the company as a whole and its operating divisions or business segments;
- Internal audit reports;
- Default in payment of interest or non-payment of principal on any public deposit, secured creditor or financial institution;
- Any issue which involves possible public or product liability claims of a substantial nature;
- Details of any joint venture or collaboration agreement;
- Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.8) (a) Listed companies with either a turnover of over Rs.100 crores or a paid-up capital of Rs.20 crores should set up Audit Committees within two years.(b) Audit Committees should consist of at least three members, all drawn from a company’s non-executive directors.(c) To be effective, the Audit Committees should have clearly defined Terms of Reference and its members must be willing to spend more time on the company’s work.
(d) Audit Committees should assist the board in fulfilling its functions relating to financial statements and proposals that accompany the public issue of any security.
(e) Audit Committees should periodically interact with the statutory auditors and the internal auditors to ascertain the quality of the company’s accounts as well as the capability of the auditors themselves.
9) Under “Additional Shareholder’s Information”, listed companies should give data on:
(a)High and low monthly averages of share prices;
(b)Greater detail on business segments.
10) (a) Consolidation of Group Accounts should be optional and subject to:
(i)the FIs allowing companies to leverage on the basis of the group’s assets, and
(ii)the Income Tax Deptt. using the group concept in assessing corporate income tax.
(b) If a company chooses to voluntarily consolidate, it should not be necessary to represent the accounts of its subsidiary companies u/S 212 of Companies Act.
11) Major Indian stock exchanges should gradually insist upon a compliance certificate, signed by the CEO and the CFO, which clearly states that:
- The management is responsible for the preparation, integrity and fair presentation of financial statements and other information in the Annual Report;
- The accounting policies and principles conform to standard practice, and where they do not, full disclosure has been made of any material departures;
- The board has overseen the company’s system of internal accounting and administrative controls systems either director or through its Audit Committee.
12) For all companies with paid-up capital of Rs.20 crores or more, the quality and quantity of disclosure that accompanies a GDR issue should be the norm for any domestic issue. History, Evolution, Development and Emergence of Corporate Governance
13) Government must allow far greater funding to the corporate sector against the security of shares and other paper.
14) (a) If any company goes to more than one credit rating agency, then it must divulge in the prospectus and issue document the rating of all the agencies that did such an exercise.
(b) It is not enough to state the ratings. These must be given in a tabular format that shows where the company stands relative to higher and lower ranking. It makes considerable difference to an investor to know whether the rating agency or agencies placed the company in the top slots, or in the middle, or in the bottom.
15) Companies that default on fixed deposits should not be permitted to:
(a)accept further deposits and make inter-corporate loans or investments until the default is made good; and
(b)declare dividends until the default is made good.
History, Evolution, Development and Emergence of Corporate Governance
