corporate governance -- final[1]

8/14/2019 Corporate Governance -- Final[1]

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CORPORATE GOVERNANCE

Overview

The evolution of Corporate Governance in India began in early 90s. TheThe evolution of Corporate Governance in India began in early 90s. The starting point was the recommendations of the Cadbury Committee Reportstarting point was the recommendations of the Cadbury Committee Report

after which followed various committees, leading to a formal Corporateafter which followed various committees, leading to a formal Corporate

Governance Code. This code was notified by Securities Exchange Board ofGovernance Code. This code was notified by Securities Exchange Board of

India (SEBI) by inserting a new Clause 49 in the listing guidelines to theIndia (SEBI) by inserting a new Clause 49 in the listing guidelines to the

Stock Exchanges making it mandatory for the listing companies to followStock Exchanges making it mandatory for the listing companies to follow

the requirements of Clause 49 effective January 01, 2006. The major areasthe requirements of Clause 49 effective January 01, 2006. The major areas

of compliance in Clause 49 are:of compliance in Clause 49 are:

Appointment of required number of independent directorsAppointment of required number of independent directors

Larger role of Audit CommitteeLarger role of Audit Committee

CEO/CFO Certification of Accounts (will become applicable forCEO/CFO Certification of Accounts (will become applicable for

2005-06 Accounts)2005-06 Accounts)

Code of Conduct for Board / Senior ManagementCode of Conduct for Board / Senior Management Risk Minimization Report to the BoardRisk Minimization Report to the Board

Legal Compliance Report to the BoardLegal Compliance Report to the Board

Compliance relating to Subsidiary CompaniesCompliance relating to Subsidiary Companies

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CORPORATE GOVERNANCE IN CHINA AND INDIA

Indian companies with global ambitions are better governed than theirIndian companies with global ambitions are better governed than their

Chinese counterparts, a Harvard professor says. But in competition, it mayChinese counterparts, a Harvard professor says. But in competition, it may not matter.not matter.

By:By:

William J. HolsteinWilliam J. Holstein

Indian companies aspiring to become world-spanning multinationalsIndian companies aspiring to become world-spanning multinationals

demonstrate better corporate governance than their Chinese rivals, saysdemonstrate better corporate governance than their Chinese rivals, says

Tarun Khanna, a professor at Harvard Business School and author of a newTarun Khanna, a professor at Harvard Business School and author of a new

book,book, Billions of Entrepreneurs: How China and India Are Reshaping TheirBillions of Entrepreneurs: How China and India Are Reshaping Their

Future and YoursFuture and Yours. But Chinese companies may not need world-class. But Chinese companies may not need world-class

governance to emerge as fierce competitors, says Khanna. Here are editedgovernance to emerge as fierce competitors, says Khanna. Here are edited excerpts from a recent conversation:excerpts from a recent conversation:

Much as their societies and political systems are different, are Indian andMuch as their societies and political systems are different, are Indian and

Chinese Companies complete opposites when it comes to corporateChinese Companies complete opposites when it comes to corporate

governance?governance?

Absolutely. Indian companies are so much better governed. India is sort of aAbsolutely. Indian companies are so much better governed. India is sort of a

noisier version of the U.S. system, which is that you have to be accountablenoisier version of the U.S. system, which is that you have to be accountable

to shareholders and all the other stakeholders. The principles are the same,to shareholders and all the other stakeholders. The principles are the same,

but the information acquisition is a little bit more problematic in Indiabut the information acquisition is a little bit more problematic in India

compared to the U.S. It's not so easy to figure out everything you need to.compared to the U.S. It's not so easy to figure out everything you need to.

But there's a very vibrant, credible business media. No opinion is forbiddenBut there's a very vibrant, credible business media. No opinion is forbidden

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to be expressed. Information is noisy and unbiasedno one is willfullyto be expressed. Information is noisy and unbiasedno one is willfully

distorting the truth.distorting the truth.

China is the oppositeit's noise-free but biased. You get a clean story butChina is the oppositeit's noise-free but biased. You get a clean story but

the story isn't always right. There are views that cannot be expressed.the story isn't always right. There are views that cannot be expressed.

Which country has more independent boards of directors?Which country has more independent boards of directors?

In India, there is a spectrum of companies, such as Infosys, which on someIn India, there is a spectrum of companies, such as Infosys, which on some

dimensions is better governed than companies in the West in terms of howdimensions is better governed than companies in the West in terms of how

quickly it discloses things and how quickly it complies with NASDAQquickly it discloses things and how quickly it complies with NASDAQ

norms. At the other end of the spectrum you have companies that are still thenorms. At the other end of the spectrum you have companies that are still thefiefdoms of families, many of which are badly governed. But even thosefiefdoms of families, many of which are badly governed. But even those

companies are accountable to the market. Market pressures will force themcompanies are accountable to the market. Market pressures will force them

to clean up their act to some extent. The equity markets function so well thatto clean up their act to some extent. The equity markets function so well that

it's hard to believe you could be a continuous violator of norms of goodit's hard to believe you could be a continuous violator of norms of good

governance and still have access to the equity markets.governance and still have access to the equity markets.

And what about China?And what about China?

None of that matters in China because the financial markets still don't workNone of that matters in China because the financial markets still don't work

in the sense that we think of them working in the U.S. In China, all stockin the sense that we think of them working in the U.S. In China, all stock

prices move together. They move up on a given day or they move down.prices move together. They move up on a given day or they move down.

There is no company-specific information embodied in the stock price. YouThere is no company-specific information embodied in the stock price. You

can't possibly decide that a company is good or bad because the market isn'tcan't possibly decide that a company is good or bad because the market isn't

working in that sense. What you see is aggregate enthusiasm, or lackworking in that sense. What you see is aggregate enthusiasm, or lack

thereof, for China Inc. The market is not putting pressure on managers tothereof, for China Inc. The market is not putting pressure on managers to

behave in ways that approximate corporate governance in the West.behave in ways that approximate corporate governance in the West.

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How can you say the markets don't work when they have rallied so wellHow can you say the markets don't work when they have rallied so well

and long?and long?

Whether there's a rally or not is utterly irrelevant. The question is, what isWhether there's a rally or not is utterly irrelevant. The question is, what is

the information content [driving] stock prices? If the stock price of a badthe information content [driving] stock prices? If the stock price of a bad

company can go up as much as the stock price of a good company, how cancompany can go up as much as the stock price of a good company, how can

that reflect good corporate governance?that reflect good corporate governance?

Do the Chinese have boards with independent directors?Do the Chinese have boards with independent directors?

There are many boards that are beginning to look like Western boardsThere are many boards that are beginning to look like Western boards

some independent directors. For sure, there is an internal struggle on thesome independent directors. For sure, there is an internal struggle on the

boards in which the newcomers are trying to educate and coax the olderboards in which the newcomers are trying to educate and coax the older

guard to begin to adhere to some norms.guard to begin to adhere to some norms.

In my book, I talk about the attempted Chinese takeover of Unocal. TwoIn my book, I talk about the attempted Chinese takeover of Unocal. Two

things were interesting. One is the navet and inexperience that the Chinesethings were interesting. One is the navet and inexperience that the Chinese

displayed on cross-border mergers and acquisitions. But when it came to andisplayed on cross-border mergers and acquisitions. But when it came to an

acquisition of a stake in Rio Tinto recently, they were much, much smarter.acquisition of a stake in Rio Tinto recently, they were much, much smarter.

You know there is something positive happeningthe internal dynamic ofYou know there is something positive happeningthe internal dynamic of

the board is moving in the right direction.the board is moving in the right direction.

That said, most of the boards are still answering to the Communist Party.That said, most of the boards are still answering to the Communist Party.

The question arises, "What happens when there is a conflict of interestThe question arises, "What happens when there is a conflict of interest

between an outside shareholder and the Party?" I suspect the Party wins.between an outside shareholder and the Party?" I suspect the Party wins.

Is there any political interference on Indian boards?Is there any political interference on Indian boards?

Not in the private sector. No more than there would be in the U.S. In theNot in the private sector. No more than there would be in the U.S. In the

state-owned enterprises, yes, there would be political influence.state-owned enterprises, yes, there would be political influence.

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Are companies in India and China making progress in developing talentAre companies in India and China making progress in developing talent

in the same way that Western multinationals do?in the same way that Western multinationals do?

They're both making progress. But Indian companies are significantlyThey're both making progress. But Indian companies are significantly

further along, partly because India never had a Cultural Revolution as Chinafurther along, partly because India never had a Cultural Revolution as China

did, which wiped out much of the business class. It had a residue ofdid, which wiped out much of the business class. It had a residue of

corporations already in existence. Some companies are 100 or 150 years oldcorporations already in existence. Some companies are 100 or 150 years old

and they have an established way of doing things.and they have an established way of doing things.

Where are the Chinese when it comes to managing multiculturally?Where are the Chinese when it comes to managing multiculturally?

Utterly zero. It's hard to blame them because there's a language barrier also.Utterly zero. It's hard to blame them because there's a language barrier also.

You may remember the acquisition of a German company, Schneider, byYou may remember the acquisition of a German company, Schneider, by inin

2002, which was based in Shenzhen. It was a disaster. Then they followed2002, which was based in Shenzhen. It was a disaster. Then they followed

that disaster with a bigger disaster in 2004, by buying assets from Thomsonthat disaster with a bigger disaster in 2004, by buying assets from Thomson

in France, which they also destroyed.in France, which they also destroyed.

A lot of the internal tensions were about language and cultural barriers, andA lot of the internal tensions were about language and cultural barriers, and

questions like, Can a Frenchman report to a Chinese? And what if thequestions like, Can a Frenchman report to a Chinese? And what if the

French guy makes more than the Chinese guy?French guy makes more than the Chinese guy?

How do companies of the two countries compare when it comes toHow do companies of the two countries compare when it comes to

corruption?corruption?

Here, I am not positive on India at all. Transparency International puts outHere, I am not positive on India at all. Transparency International puts out

these indices, and India and China are both close to the bottom of that list.these indices, and India and China are both close to the bottom of that list.

China does a little bit better than India. In China, there is corruption, but it isChina does a little bit better than India. In China, there is corruption, but it is

constructive corruption. You, as a bureaucrat, get to be corrupt but only afterconstructive corruption. You, as a bureaucrat, get to be corrupt but only after

you generate some value for society. You get a piece of it.you generate some value for society. You get a piece of it.

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In India, there is corruption but it's not constructive. You're not fosteringIn India, there is corruption but it's not constructive. You're not fostering

new bridges or highways. It's just shuffling stuff back and forth. I don't thinknew bridges or highways. It's just shuffling stuff back and forth. I don't think

we've cracked that in India at all. I'm very sorry about that.we've cracked that in India at all. I'm very sorry about that.

In the final analysis, does it matter that Indian companies, on the whole,In the final analysis, does it matter that Indian companies, on the whole,

have an edge over the Chinese in reaching international standards ofhave an edge over the Chinese in reaching international standards of

governance? The Chinese have huge capital at their disposal because of theirgovernance? The Chinese have huge capital at their disposal because of their

$1.5 trillion in foreign exchange reserves. Couldn't they still be fearsome$1.5 trillion in foreign exchange reserves. Couldn't they still be fearsome

competitors?competitors?

I think that's right. Corporate governance matters because you want toI think that's right. Corporate governance matters because you want to

reassure the providers of inputswhether it's time and talent, or ideas, orreassure the providers of inputswhether it's time and talent, or ideas, or

capitalthat their rights will be respected and they will get a return on it.capitalthat their rights will be respected and they will get a return on it.

But if you're already sitting on hundreds of billions of dollars of capital, andBut if you're already sitting on hundreds of billions of dollars of capital, and

you don't need to reassure anybody else because you already have youryou don't need to reassure anybody else because you already have your

capital, why have good corporate governance?capital, why have good corporate governance?

The reason the Chinese feel less pressured to do something about it is notThe reason the Chinese feel less pressured to do something about it is not

because they don't know how to do itfar from it, they have the bestbecause they don't know how to do itfar from it, they have the best

technical help from Hong Kong and other places. It's because they make atechnical help from Hong Kong and other places. It's because they make a

reasoned judgment that it's not worth their while.reasoned judgment that it's not worth their while.

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Committee, etc. The composition of these Committees is given in thisCommittee, etc. The composition of these Committees is given in this

Report. The meetings of these committees are convened on need basis andReport. The meetings of these committees are convened on need basis and

minutes of these meetings are placed for information of the Board. Majorityminutes of these meetings are placed for information of the Board. Majority

of the members of the Committees except the CFD are Independent Non-of the members of the Committees except the CFD are Independent Non-

Executive or Government nominated Directors with the Whole TimeExecutive or Government nominated Directors with the Whole Time

Directors playing a facilitating role.Directors playing a facilitating role.

The Corporation has constituted an Executive Council comprising ofThe Corporation has constituted an Executive Council comprising of

Chairman & Managing Director, the Functional Directors and the SBUChairman & Managing Director, the Functional Directors and the SBU

Heads of the Corporation. This council discusses important issuesHeads of the Corporation. This council discusses important issues

concerning the organization, analyses the same and recommend the wayconcerning the organization, analyses the same and recommend the way

forward in respect of matters discussed. Emphasis is laid on team approach,forward in respect of matters discussed. Emphasis is laid on team approach,

mutual support of functions and joint deliberations on issues by the councilmutual support of functions and joint deliberations on issues by the council

which has enhanced further the decision making process. It has thuswhich has enhanced further the decision making process. It has thus

facilitated an integrated thinking process and an aligned approach across thefacilitated an integrated thinking process and an aligned approach across the

Corporation for achieving the Corporate Vision and each one of theCorporation for achieving the Corporate Vision and each one of the

aspirational aspects contained in the Vision Statement.aspirational aspects contained in the Vision Statement.

Advisory Council:Advisory Council:

In the context of a highly competitive and dynamic environment of the OilIn the context of a highly competitive and dynamic environment of the Oil

and Gas Sector, the Corporation felt that an external Committee comprisingand Gas Sector, the Corporation felt that an external Committee comprising

of eminent people could be constituted to seek their views and guidance, notof eminent people could be constituted to seek their views and guidance, not

only on the various ongoing activities, but also on its strategic initiativesonly on the various ongoing activities, but also on its strategic initiatives

aimed towards growth and development. With this background, theaimed towards growth and development. With this background, the

Committee called, as Advisory Council was constituted in July 2005 withCommittee called, as Advisory Council was constituted in July 2005 with

the approval of the Board.the approval of the Board.

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The Committee comprises of the following members:The Committee comprises of the following members:

Shri V.K. ShungluShri V.K. Shunglu

Ex-CAGEx-CAG

Shri N.R. Narayana MurthyShri N.R. Narayana Murthy

Chairman and Cheif MentorChairman and Cheif MentorInfosys Technologies LimitedInfosys Technologies Limited

Ms. Shailaja ChandraMs. Shailaja Chandra

ChairpersonChairperson

Public Grievance CommissionPublic Grievance Commission

Shri Manab BoseShri Manab Bose

Managing DirectorManaging Director

Connectivity Consulting (P) LtdConnectivity Consulting (P) Ltd

Shri Naresh NaradShri Naresh Narad

MemberMember

Public Enterprise Selection BoardPublic Enterprise Selection Board

Ms. Rama BijapurkarMs. Rama Bijapurkar

Marketing ConsultantMarketing Consultant

Strategic Marketing ConsultingStrategic Marketing Consulting

This Council has met twice so far on October 01, 2005 and February 20,This Council has met twice so far on October 01, 2005 and February 20,

2006. Aspects related to performance of the Corporation, HPCLs endeavour2006. Aspects related to performance of the Corporation, HPCLs endeavour

for global standards for various operations, initiatives under the areas offor global standards for various operations, initiatives under the areas of

Corporate Governance, Corporate Social Responsibilities etc. were placedCorporate Governance, Corporate Social Responsibilities etc. were placed

before this council. The suggestions/ observations made by the Council isbefore this council. The suggestions/ observations made by the Council is

being progressed further by the Corporation. The advice from this highlybeing progressed further by the Corporation. The advice from this highly

eminent group would immensely benefit the Corporation in the time toeminent group would immensely benefit the Corporation in the time to

come.come.

Exercise of Authority:Exercise of Authority:

The Corporation has well documented Limits of Authority Manual, PurchaseThe Corporation has well documented Limits of Authority Manual, Purchase

Manual, Chart of Accounts, etc., facilitating the decentralized decisionManual, Chart of Accounts, etc., facilitating the decentralized decision

making process throughout the organization spread out throughout themaking process throughout the organization spread out throughout the

country at various levels of the organization.country at various levels of the organization.

Limits of Authority Manual (LAM):Limits of Authority Manual (LAM):

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The LAM lays down the authorities that can be exercised at various levelsThe LAM lays down the authorities that can be exercised at various levels

i.e. the Board, Committee of Functional Directors, the Executivei.e. the Board, Committee of Functional Directors, the Executive

Committee, the Contracts Committee, the Bids Committee and the seniorCommittee, the Contracts Committee, the Bids Committee and the senior

individual positions etc. for different activities of the Corporation. Theindividual positions etc. for different activities of the Corporation. The

manual is divided into segments representing different functions like Sales,manual is divided into segments representing different functions like Sales,

Crude & Shipping, Capital Projects, Operations & Distribution, Finance, HRCrude & Shipping, Capital Projects, Operations & Distribution, Finance, HR

etc., and provides for a decision making process through various committeesetc., and provides for a decision making process through various committees

as above, represented by inter-functional groups including Finance. Thisas above, represented by inter-functional groups including Finance. This

ensures a transparent well-considered and streamlined decision makingensures a transparent well-considered and streamlined decision making

process adhering to the laid down systems and procedures and thereby process adhering to the laid down systems and procedures and therebyleaving no room for arbitrariness.leaving no room for arbitrariness.

Purchase Manual:Purchase Manual:

This Manual lays down elaborate procedures to be followed whileThis Manual lays down elaborate procedures to be followed while

undertaking purchases and in finalization of contracts. It lays down, inter-undertaking purchases and in finalization of contracts. It lays down, inter-

alia, the purchasing authorities at various levels, norms and processes foralia, the purchasing authorities at various levels, norms and processes for

procurement.procurement.

The endeavour is always on building trust with shareholders, employees,The endeavour is always on building trust with shareholders, employees,

Customers and other stakeholders based on the basic principles of CorporateCustomers and other stakeholders based on the basic principles of Corporate

Governance i.e. transparency, fairness, disclosure and accountability.Governance i.e. transparency, fairness, disclosure and accountability.

Right to Information Act 2005:Right to Information Act 2005:

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HPCL has implemented TheHPCL has implemented TheRight to Information ActRight to Information Act, 2005 (RTI) that, 2005 (RTI) that

became effective 12th October 2005. HPCL has provided detailed became effective 12th October 2005. HPCL has provided detailed

information on this Website www.hindustanpetroleum.com, and updates theinformation on this Website www.hindustanpetroleum.com, and updates the

same from time to time. Officers across the country, representing differentsame from time to time. Officers across the country, representing different

Departments, have been appointed as Public Information Officers andDepartments, have been appointed as Public Information Officers and

Appellate Authorities to deal with the queries read from the Indian CitizensAppellate Authorities to deal with the queries read from the Indian Citizens

under RTI Act.under RTI Act.

Integrity Pact:Integrity Pact:

The Corporation has introduced Integrity Pact (IP) to enhance ethics /The Corporation has introduced Integrity Pact (IP) to enhance ethics /

transparency in the process of awarding contracts. A MoU has been signedtransparency in the process of awarding contracts. A MoU has been signed

with Transparency International on July 13, 2007. This was madewith Transparency International on July 13, 2007. This was made

applicable in the Corporation effective September 01, 2007. The Integrityapplicable in the Corporation effective September 01, 2007. The Integrity

Pact has now become a part of tender documents to be signed by thePact has now become a part of tender documents to be signed by the

Company and by the successful vendor / bidder.Company and by the successful vendor / bidder.

CORPORATE GOVERNANCE IN CHINACORPORATE GOVERNANCE IN CHINA

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Much as their societies and political systems are difMuch as their societies and political systems are different, areferent, are

Indian and Chinese Companies complete opposites when it Indian and Chinese Companies complete opposites when it

comes to corporate governance?comes to corporate governance?

Absolutely. Indian companies are so much better governed. India is sort of aAbsolutely. Indian companies are so much better governed. India is sort of a

noisier version of the U.S. system, which is that you have to be accountablenoisier version of the U.S. system, which is that you have to be accountable

to shareholders and all the other stakeholders. The principles are the same,to shareholders and all the other stakeholders. The principles are the same,

but the information acquisition is a little bit more problematic in Indiabut the information acquisition is a little bit more problematic in India

compared to the U.S. It's not so easy to figure out everything you need to.compared to the U.S. It's not so easy to figure out everything you need to.

But there's a very vibrant, credible business media. No opinion is forbiddenBut there's a very vibrant, credible business media. No opinion is forbiddento be expressed. Information is noisy and unbiasedno one is willfullyto be expressed. Information is noisy and unbiasedno one is willfully

distorting the truth. China is the oppositeit's noise-free but biased. You getdistorting the truth. China is the oppositeit's noise-free but biased. You get

a clean story but the story isn't always right. There are views that cannot bea clean story but the story isn't always right. There are views that cannot be

expressed.expressed.

Which country has more independent boards of directors?Which country has more independent boards of directors?

In India, there is a spectrum of companies, such as InfosysIn India, there is a spectrum of companies, such as Infosys , which on some, which on some

dimensions is better governed than companies in the West in terms of howdimensions is better governed than companies in the West in terms of how

quickly it discloses things and how quickly it complies with NASDAQquickly it discloses things and how quickly it complies with NASDAQ

norms. At the other end of the spectrum you have companies that are still thenorms. At the other end of the spectrum you have companies that are still the

fiefdoms of families, many of which are badly governed. But even thosefiefdoms of families, many of which are badly governed. But even those

companies are accountable to the market. Market pressures will force themcompanies are accountable to the market. Market pressures will force them

to clean up their act to some extent. The equity markets function so well thatto clean up their act to some extent. The equity markets function so well that

it's hard to believe you could be a continuous violator of norms of goodit's hard to believe you could be a continuous violator of norms of good

governance and still have access to the equity markets.governance and still have access to the equity markets.

And what about China?And what about China?

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None of that matters in China because the financial markets still don't workNone of that matters in China because the financial markets still don't work

in the sense that we think of them working in the U.S. In China, all stockin the sense that we think of them working in the U.S. In China, all stock

prices move together. They move up on a given day or they move down.prices move together. They move up on a given day or they move down.

There is no company-specific information embodied in the stock price. YouThere is no company-specific information embodied in the stock price. You

can't possibly decide that a company is good or bad because the market isn'tcan't possibly decide that a company is good or bad because the market isn't

working in that sense. What you see is aggregate enthusiasm, or lackworking in that sense. What you see is aggregate enthusiasm, or lack

thereof, for China Inc. The market is not putting pressure on managers tothereof, for China Inc. The market is not putting pressure on managers to

behave in ways that approximate corporate governance in the West.behave in ways that approximate corporate governance in the West.

How can you say the markets don't work when they have ralliedHow can you say the markets don't work when they have rallied

so well and long?so well and long?

Whether there's a rally or not is utterly irrelevant. The question is, what isWhether there's a rally or not is utterly irrelevant. The question is, what is

the information content [driving] stock prices? If the stock price of a badthe information content [driving] stock prices? If the stock price of a bad

company can go up as much as the stock price of a good company, how cancompany can go up as much as the stock price of a good company, how can

that reflect good corporate governance?that reflect good corporate governance?

Do the Chinese have boards with independent directors?Do the Chinese have boards with independent directors?

There are many boards that are beginning to look like Western boardsThere are many boards that are beginning to look like Western boards

some independent directors. For sure, there is an internal struggle on thesome independent directors. For sure, there is an internal struggle on the

boards in which the newcomers are trying to educate and coax the olderboards in which the newcomers are trying to educate and coax the older

guard to begin to adhere to some norms.guard to begin to adhere to some norms.

In my book, I talk about the attempted Chinese takeover of Unocal. TwoIn my book, I talk about the attempted Chinese takeover of Unocal. Two

things were interesting. One is the navet and inexperience that the Chinesethings were interesting. One is the navet and inexperience that the Chinese

displayed on cross-border mergers and acquisitions. But when it came to andisplayed on cross-border mergers and acquisitions. But when it came to an

acquisition of a stake in Rio Tinto recently, they were much, much smarter.acquisition of a stake in Rio Tinto recently, they were much, much smarter.

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You know there is something positive happeningthe internal dynamic ofYou know there is something positive happeningthe internal dynamic of

the board is moving in the right direction.the board is moving in the right direction.

That said, most of the boards are still answering to the Communist Party.That said, most of the boards are still answering to the Communist Party.

Is there any political interference on Indian boards?Is there any political interference on Indian boards?

Not in the private sector. No more than there would be in the U.S. In theNot in the private sector. No more than there would be in the U.S. In the

state-owned enterprises, yes, there would be political influence.state-owned enterprises, yes, there would be political influence.

Are companies in India and China making progress in Are companies in India and China making progress in

developing talent in the same way that Western multinationalsdeveloping talent in the same way that Western multinationals

do?do?

They're both making progress. But Indian companies are significantlyThey're both making progress. But Indian companies are significantly

further along, partly because India never had a Cultural Revolution as Chinafurther along, partly because India never had a Cultural Revolution as China

did, which wiped out much of the business class. It had a residue ofdid, which wiped out much of the business class. It had a residue of

corporations already in existence. Some companies are 100 or 150 years oldcorporations already in existence. Some companies are 100 or 150 years old and they have an established way of doing things.and they have an established way of doing things.

Where are the Chinese when it comes to managingWhere are the Chinese when it comes to managing

multiculturally?multiculturally?

Utterly zero. It's hard to blame them because there's a language barrier also.Utterly zero. It's hard to blame them because there's a language barrier also.

You may remember the acquisition of a German company, Schneider, by inYou may remember the acquisition of a German company, Schneider, by in

2002, which was based in Shenzhen. It was a disaster. Then they followed2002, which was based in Shenzhen. It was a disaster. Then they followed

that disaster with a bigger disaster in 2004, by buying assets from Thomsonthat disaster with a bigger disaster in 2004, by buying assets from Thomson

in France, which they also destroyed.in France, which they also destroyed.

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A lot of the internal tensions were about language and culturalA lot of the internal tensions were about language and cultural

barriers, and questions like, Can a Frenchman report to abarriers, and questions like, Can a Frenchman report to a

Chinese? And what if the French guy makes more than theChinese? And what if the French guy makes more than the

Chinese guy?Chinese guy? How do companies of the two countries compareHow do companies of the two countries compare

when it comes to corruption?when it comes to corruption?

Here, I am not positive on India at all. Transparency International puts outHere, I am not positive on India at all. Transparency International puts out

these indices, and India and China are both close to the bottom of that list.these indices, and India and China are both close to the bottom of that list.

China does a little bit better than India. In China, there is corruption, but it isChina does a little bit better than India. In China, there is corruption, but it is

constructive corruption. You, as a bureaucrat, get to be corrupt but only afterconstructive corruption. You, as a bureaucrat, get to be corrupt but only after

you generate some value for society. You get a piece of it.you generate some value for society. You get a piece of it.

In India, there is corruption but it's not constructive. You're not fosteringIn India, there is corruption but it's not constructive. You're not fostering

new bridges or highways. It's just shuffling stuff back and forth. I don't thinknew bridges or highways. It's just shuffling stuff back and forth. I don't think

we've cracked that in India at all. I'm very sorry about that.we've cracked that in India at all. I'm very sorry about that.

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In the final analysis, does it matter that Indian companies, onIn the final analysis, does it matter that Indian companies, on

the whole, have an edge over the Chinese in reachingthe whole, have an edge over the Chinese in reaching

international standards of governance? The Chinese have hugeinternational standards of governance? The Chinese have huge

capital at their disposal because of their $1.5 trillion in foreigncapital at their disposal because of their $1.5 trillion in foreign

exchange reserves. Couldn't they still be fearsome competitors?exchange reserves. Couldn't they still be fearsome competitors?

I think that's right. Corporate governance matters because you want toI think that's right. Corporate governance matters because you want to

reassure the providers of inputswhether it's time and talent, or ideas, orreassure the providers of inputswhether it's time and talent, or ideas, or

capitalthat their rights will be respected and they will get a return on it.capitalthat their rights will be respected and they will get a return on it.

But if you're already sitting on hundreds of billions of dollars of capital, andBut if you're already sitting on hundreds of billions of dollars of capital, and

you don't need to reassure anybody else because you already have youryou don't need to reassure anybody else because you already have your

capital, why have good corporate governance?capital, why have good corporate governance?

The reason the Chinese feel less pressured to do something about it is notThe reason the Chinese feel less pressured to do something about it is not

because they don't know how to do itfar from it, they have the bestbecause they don't know how to do itfar from it, they have the best

technical help from Hong Kong and other places. It's because they make atechnical help from Hong Kong and other places. It's because they make a

reasoned judgment that it's not worth their while.reasoned judgment that it's not worth their while.

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ARTICLES:ARTICLES:

Corporate Governance in India: Has

Clause 49 Made a Difference?

In recent years, more and more Indian companies have beenIn recent years, more and more Indian companies have been

raising capital overseas by getting themselves listed onraising capital overseas by getting themselves listed on

international stock exchanges. These efforts have beeninternational stock exchanges. These efforts have been

accompanied by the Indian government's drive to attract more foreign directaccompanied by the Indian government's drive to attract more foreign direct

investment (FDI). Both factors have gone hand in hand with the realizationinvestment (FDI). Both factors have gone hand in hand with the realization

that if Indian companies want more access to global capital markets, theythat if Indian companies want more access to global capital markets, they

will need to make their operations and financial results more transparent. Inwill need to make their operations and financial results more transparent. In

other words, they will need to improve their standards of corporateother words, they will need to improve their standards of corporate

governance.governance.

The Securities and Exchange Board of India, or SEBI, which regulatesThe Securities and Exchange Board of India, or SEBI, which regulates

India's stock markets, took a major step in this direction a year ago. It askedIndia's stock markets, took a major step in this direction a year ago. It asked

Indian firms above a certain size to implement Clause 49, a regulation thatIndian firms above a certain size to implement Clause 49, a regulation that

strengthens the role of independent directors serving on corporate boards.strengthens the role of independent directors serving on corporate boards.

Have these steps made a difference to corporate governance in Indian firms?Have these steps made a difference to corporate governance in Indian firms?

In the first of a two-part interview, India Knowledge@Wharton spoke aboutIn the first of a two-part interview, India Knowledge@Wharton spoke about

these issues with professorsthese issues with professorsJitendra SinghJitendra Singh andandMike UseemMike Useem of Wharton'sof Wharton's

Management Department who, with their colleagueManagement Department who, with their colleagueHarbir SinghHarbir Singh, are, are

putting together an Executive Education program in Mumbai on Corporateputting together an Executive Education program in Mumbai on Corporate

Governance in India.Governance in India.

17
http://www.wharton.upenn.edu/faculty/singhj.htmlhttp://www.wharton.upenn.edu/faculty/singhj.htmlhttp://www.wharton.upenn.edu/faculty/singhj.htmlhttp://www.wharton.upenn.edu/faculty/useem.htmlhttp://www.wharton.upenn.edu/faculty/useem.htmlhttp://www.wharton.upenn.edu/faculty/useem.htmlhttp://www.wharton.upenn.edu/faculty/singh.htmlhttp://www.wharton.upenn.edu/faculty/singh.htmlhttp://www.wharton.upenn.edu/faculty/singh.htmlhttp://www.wharton.upenn.edu/faculty/singhj.htmlhttp://www.wharton.upenn.edu/faculty/useem.htmlhttp://www.wharton.upenn.edu/faculty/singh.html


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Corporate governance: What India must do?

Ram Prasad Sahu

January 19, 2009

MMore skeletons tumble out in bear markets than during bull phases andore skeletons tumble out in bear markets than during bull phases and

SatyamSatyam Computer in India and the collapse of investment banks in the USComputer in India and the collapse of investment banks in the US

are cases in point. Satyamgate laid bare the complete lack of accountabilityare cases in point. Satyamgate laid bare the complete lack of accountability

in the company and prompted questions on corporate governance practicesin the company and prompted questions on corporate governance practices

of the country's 6,000-odd listed entities.of the country's 6,000-odd listed entities.

Corporate governance, which is the system that helps firms control andCorporate governance, which is the system that helps firms control and

direct operations, is in the spotlight as key parts of the governancedirect operations, is in the spotlight as key parts of the governance

framework such as audit and finance functions have failed to check theframework such as audit and finance functions have failed to check the

promoter-driven agendas.promoter-driven agendas.

The Smart InvestorThe Smart Investorspoke to fund managers and research heads to gauge thespoke to fund managers and research heads to gauge the

status of corporate governance practices prevailing in India, what could bestatus of corporate governance practices prevailing in India, what could be

done to improve the same and how all this will impact investors.done to improve the same and how all this will impact investors.

A well-balanced board of directors, proactive shareholders and swift actionA well-balanced board of directors, proactive shareholders and swift action

against malpractices could restore market confidence.against malpractices could restore market confidence.

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Role of the boardRole of the board

Among the many shortcomings of the Satyam episode has been the role ofAmong the many shortcomings of the Satyam episode has been the role of

independent directors who were supposed to safeguard the interests of allindependent directors who were supposed to safeguard the interests of all

stakeholders.stakeholders.

While the three committees (See: Corporate Governance Committees) haveWhile the three committees (See: Corporate Governance Committees) have

explicitly mentioned the role, independence, remuneration andexplicitly mentioned the role, independence, remuneration and

responsibilities of independent directors, the same has not translated intoresponsibilities of independent directors, the same has not translated into

becoming an adequate check on managerial excesses. becoming an adequate check on managerial excesses.

Says Andrew Holland, CEO, equities, Ambit Capital, "Independent directorsSays Andrew Holland, CEO, equities, Ambit Capital, "Independent directors

should also (in addition to the management) be held accountable for boardshould also (in addition to the management) be held accountable for board

decisions and audit-related compliance practices."decisions and audit-related compliance practices."

While there have been suggestions for a selection committee to chooseWhile there have been suggestions for a selection committee to choose

independent directors, mandatory training, performance assessments, limitindependent directors, mandatory training, performance assessments, limit

on directorships and compulsory attendance of Board meetings, two keyon directorships and compulsory attendance of Board meetings, two key

areas relating to CEO/Board chair segregation and number of independentareas relating to CEO/Board chair segregation and number of independent

directors could be the right steps forward.directors could be the right steps forward.

Says Neville Dumasia, head, Governance, Risk and Compliance, KPMG,Says Neville Dumasia, head, Governance, Risk and Compliance, KPMG,

"The concept of CEO and Board chair separation is well accepted in Europe,"The concept of CEO and Board chair separation is well accepted in Europe,

and American companies are steadily moving in that direction. This wouldand American companies are steadily moving in that direction. This would

bring a better balance in the boardroom.bring a better balance in the boardroom.

"The second issue of a majority of independent directors (number currently"The second issue of a majority of independent directors (number currently

varies from a third to a half), which is the case with companies in NYSE andvaries from a third to a half), which is the case with companies in NYSE and

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NASDAQ, could prove tricky as Indian boards are promoter-dominated.NASDAQ, could prove tricky as Indian boards are promoter-dominated.

Regulations could however, change all that. "In fact, in a number ofRegulations could however, change all that. "In fact, in a number of

European and American companies the only sitting executive on the BoardEuropean and American companies the only sitting executive on the Board

is the CEO," says Dumasia.is the CEO," says Dumasia.

Role of AuditorsRole of Auditors

Though a lion's share of the focus in the Satyam episode was on the role ofThough a lion's share of the focus in the Satyam episode was on the role of

the independent directors, experts believe the role of auditors is now inthe independent directors, experts believe the role of auditors is now in

spotlight.spotlight.

Asks a fund manager, "Auditors are not changed for ages together. WhyAsks a fund manager, "Auditors are not changed for ages together. Why

can't we have a system similar to the one adopted by PSU banks wherecan't we have a system similar to the one adopted by PSU banks where

auditors have to be changed every three years?" Holland, however, believesauditors have to be changed every three years?" Holland, however, believes

that instead of changing auditors annually, one could look at changing auditthat instead of changing auditors annually, one could look at changing audit

heads of the same firm.heads of the same firm.

Fallout of the Satyam case is the issue of delays involved in enforcement ofFallout of the Satyam case is the issue of delays involved in enforcement of

Indian corporate laws. The need is to enforce corporate laws in aIndian corporate laws. The need is to enforce corporate laws in a

transparent, swift and uniform fashion. "Accountability and action againsttransparent, swift and uniform fashion. "Accountability and action against

fraud/negligence are major concerns," believes N K Jain, secretary andfraud/negligence are major concerns," believes N K Jain, secretary and

CEO, Institute of Company Secretaries of India. "Professionals (auditors)CEO, Institute of Company Secretaries of India. "Professionals (auditors)

should be made accountable and consequences (punishment) should followshould be made accountable and consequences (punishment) should follow

if there are any deficiencies and slip-ups," he adds.if there are any deficiencies and slip-ups," he adds.

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Minority ShareholdersMinority Shareholders

Experts believe that it is the institutional investors who have the tools,Experts believe that it is the institutional investors who have the tools,

bandwidth and clout to extract information and play an activist role (as hadbandwidth and clout to extract information and play an activist role (as hadhappened in Satyam's case) in ensuring that managements don't go off-track.happened in Satyam's case) in ensuring that managements don't go off-track.

If institutional investors act collectively, they can demand the requiredIf institutional investors act collectively, they can demand the required

changes at companies they have invested in.changes at companies they have invested in.

Says Anup Bagchi, executive director, ICICISays Anup Bagchi, executive director, ICICI Securities, "While independentSecurities, "While independent

directors can certainly play an important role in ensuring better riskdirectors can certainly play an important role in ensuring better risk

management, demand for good governance by institutional shareholders ismanagement, demand for good governance by institutional shareholders is

the best driver towards higher governance standards." Establishing minoritythe best driver towards higher governance standards." Establishing minority

shareholders' groups can also be a positive step. Individual shareholdersshareholders' groups can also be a positive step. Individual shareholders

through these groups can communicate with institutional shareholders forthrough these groups can communicate with institutional shareholders for

taking up their concerns with the company's management.taking up their concerns with the company's management.

While retail investors cannot bring about many changes to a corporateWhile retail investors cannot bring about many changes to a corporate

agenda, they can take precautions before making investments.agenda, they can take precautions before making investments. Says ShaileshSays Shailesh

Haribhakti, executive chairman and managing partner, Haribhakti & Co,Haribhakti, executive chairman and managing partner, Haribhakti & Co,

"The criteria of consistent track record, transparency in dealings with"The criteria of consistent track record, transparency in dealings with

stakeholders, disclosure of all relevant information and accountability atstakeholders, disclosure of all relevant information and accountability at

levels of the organization should help in making the investment decision."levels of the organization should help in making the investment decision."

While it might be difficult for retail investors to get hold of information onWhile it might be difficult for retail investors to get hold of information on

all aspects of the organization they will be well served to keep an eye out forall aspects of the organization they will be well served to keep an eye out for

notes to the accounts. Says Holland, "Notes to the accounts are a usefulnotes to the accounts. Says Holland, "Notes to the accounts are a useful

source of information and reading them gives an idea of the exceptions orsource of information and reading them gives an idea of the exceptions or

practices that the auditor has chosen to single out."practices that the auditor has chosen to single out."

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While our survey shows that experts believe that retail investors areWhile our survey shows that experts believe that retail investors are

indifferent about corporate governance, the Satyam episode will probablyindifferent about corporate governance, the Satyam episode will probably

highlight the need to weigh this aspect. A KPMG study on companies listedhighlight the need to weigh this aspect. A KPMG study on companies listed

in the UK and US indicated that markets tend to give a lower valuation toin the UK and US indicated that markets tend to give a lower valuation to

companies with perceived corporate governance problems.companies with perceived corporate governance problems.

Experts point out that in India companies such as HDFCExperts point out that in India companies such as HDFC and BHEL tend toand BHEL tend to

get a better valuation than their peers as do professionally-runget a better valuation than their peers as do professionally-run

companiescompanies like HUL, ITC and Infosyslike HUL, ITC and Infosys not just due to their performance, butnot just due to their performance, but

also due to their adherence to corporate governance norms.also due to their adherence to corporate governance norms.

What is next?What is next?

Our survey and feedback from various experts indicates that a majority ofOur survey and feedback from various experts indicates that a majority of

BSE SensexBSE Sensex companies are perceived to be above average in terms ofcompanies are perceived to be above average in terms of

corporate governance practices. While some, such as Jain, also believe thatcorporate governance practices. While some, such as Jain, also believe that

corporate governance norms must be redefined in light of the Satyamcorporate governance norms must be redefined in light of the Satyam

episode.episode.

While the corporate governance framework in the country is seen at par withWhile the corporate governance framework in the country is seen at par with

other developed markets, the same has to be implemented in 'letter as wellother developed markets, the same has to be implemented in 'letter as well

as spirit'.as spirit'.

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The Challenges of Adopting Better Corporate Governance NormsThe Challenges of Adopting Better Corporate Governance Norms

The recent growth in corporateThe recent growth in corporate

governance literature has focused ongovernance literature has focused on

ways that corporations work. Firmways that corporations work. Firm

behavior was earlier modeled on the behavior was earlier modeled on the

argument of the neo-classicists whoargument of the neo-classicists who

asserted that firms are nothing moreasserted that firms are nothing more

than production counters. All activities of the firm were geared so as tothan production counters. All activities of the firm were geared so as to

maximize profits.maximize profits.Finance literature in particular came a long way in explaining the variousFinance literature in particular came a long way in explaining the various

financial theories of firms and the behaviors associated with them. With thefinancial theories of firms and the behaviors associated with them. With the

increasing understanding that mere economic and production basedincreasing understanding that mere economic and production based

explanations do not exhaustively describe the motivations for governance,explanations do not exhaustively describe the motivations for governance,

researchers have focused on the behavioral side of firm performance toresearchers have focused on the behavioral side of firm performance to

justify the economic rationale of such typical behaviors.justify the economic rationale of such typical behaviors.

Corporate governance practices have gained a greater impetus after theCorporate governance practices have gained a greater impetus after the

adoption of the much-celebrated Securities and Exchange Board of Indiaadoption of the much-celebrated Securities and Exchange Board of India

(SEBI) appointed Kumar Mangalam Birla Committee (KMBC) Report on(SEBI) appointed Kumar Mangalam Birla Committee (KMBC) Report on

Corporate Governance. The acceptance and ratification by SEBI in earlyCorporate Governance. The acceptance and ratification by SEBI in early

2000 of the KMBC report on corporate governance has paved the way to2000 of the KMBC report on corporate governance has paved the way to

rationalize and restructure governance practices in corporate India. Therationalize and restructure governance practices in corporate India. The

SEBI report was a timely intervention to keep a tab on the uninhibitedSEBI report was a timely intervention to keep a tab on the uninhibited

corporate misdemeanors rampant in India. The recommendations arecorporate misdemeanors rampant in India. The recommendations are

supposed to be enforced through provisions in listing agreements by localsupposed to be enforced through provisions in listing agreements by local

stock exchanges where the companies are listed.stock exchanges where the companies are listed.

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BIBLIOGRAPHYBIBLIOGRAPHY

WEBSITES:WEBSITES:

www.businessweek.comwww.businessweek.com

www.chinacsr.comwww.chinacsr.com
http://www.businessweek.com/http://www.businessweek.com/http://www.businessweek.com/

corporate governance -- final[1]

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