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Beyond corporate frauds
March 23, 2009
Human greed is as old as human civilisation. A fraud is a manifestation of greed coupled with cunning and deception. No system of corporate governance can be evaluated on the basis of big corporate frauds. Such frauds are aberrations.
They have to be tackled with speed, focus and condign punishments of a career-ending nature by a credible single institutional agency like the Serious Fraud Investigation Office established by statute. Special courts have to be set up for effective and speedy prosecution of those guilty.
The SFIO could be set up on the lines of the Serious Fraud Office of the UK, established under the Criminal Justice Act, 1987, with expert teams comprising of various professionals such as lawyers, forensic accountants and police officers seconded from police forces.
To assume that a system of corporate governance would be a foolproof protection against big corporate frauds would be na�ve. Hence, to tinker with corporate governance regulation as a knee-jerk reaction to big corporate fraus may not be wise.
Beyond Clause 49
It is self-evident that the institution of independent directors and audit are the pillars of corporate governance without which corporate governance becomes a sham -- an edifice in quicksand.
Clause 49 of the Listing Agreement has no doubt brought about a conceptual primacy in this regard. However, in practice these two institutions have been rendered a farce of sorts.
The way independent directors are appointed in India does not inspire much confidence. If a modicum of independence on the part of independent director is to be ensured, a total revamping of the process is called for.
Only the nomination committee of the Board, consisting solely of independent directors, should have the responsibility to propose the names of independent directors.
The principal promoter of the company should disclose to the nomination committee, the nature of any relationship that he has with the person(s) proposed to be appointed as independent directors of the company.
For ensuring better independence, both real and perceived, it would be appropriate that an independent director should not continue as such for more than two terms of three years each.
It is also important that an independent director should not be on more than five boards so as to allow him/her sufficient time and focus to be an effective independent director on the existing boards. It is also desirable that the remuneration of the independent directors is reasonably attractive.
Training independent directors
Continuing education for independent directors would be highly desirable. Premier management institutions and professional institutes should be encouraged to run development programmes of short duration for independent directors.
The corporate governance report should give details of such management development programmes attended by the independent directors of the company.
It would not be a bad idea to set up a self-regulatory body called 'The Institute of Directors'. It could be a top-of-the-line institution to nurture, promote and regulate the profession of independent directors.
Nurturing the profession of independent directors requires a great amount of restraint and imagination on the part of the regulators and the law-enforcers so that eminent and good people are not discouraged from being on company boards.
One of the ways to reinforce the audit function is to constitute a high-powered 'Audit and Accounts Oversight Board' consisting of eminent people of high public standing with requisite qualifications.
This 'Audit and Accounts Oversight Board' should have the liberty to pick up the annual accounts of a few companies out of the leading 100 listed companies of India, for a detailed and transparent scrutiny every year.
After such a scrutiny, a short synopsis of its findings in a highly-readable form should be posted on the regulators website as well as on the website of stock exchanges and that of the company.
The corporate governance report should cover in some detail the areas covered by the internal audit of the company with the comments of both the audit committee as well as that of the internal auditor of the company.
It should be prescribed that, in the case of listed companies of a certain size, the internal audit should be carried out only by an independent internal auditor to be selected by the audit committee of the company on a transparent basis.
A Holistic Approach
With the increasing distance between ownership and management of companies, the only way to ensure survival and prosperity to companies in a global era is through corporate governance.
A holistic approach to corporate governance would be to adopt a stakeholder-centric corporate governance model, as opposed to a shareholder-centric corporate governance model. Who are the typical stakeholders in a stakeholder-centric corporate governance model?
They are (a) the employees, (b) the customers, (c ) the lenders, (d) the community and (e) the shareholders. In a stakeholder-centric corporate governance model, the best interests of all the stakeholders are taken into account.
In this context, it would be tempting to say that market forces should determine the kind of corporate governance practices that a company should adopt.
However, it should be said that the threshold for such corporate governance practices should be laid down by principle-driven regulation. Companies which exceed such a regulatory threshold would obviously be rewarded by market forces.
After all, a great institution can be continually built to last only when those who build it share wealth and power as a result.
Now is the time to reinvent corporate governance as a self-enriching way of life. The Tatas are a good example of this. India that has shown five millennia of greatness can surely be the cradle for many more Tatas!
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