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Corporate governance: What India must do
Ram Prasad Sahu | January 19, 2009
Corporate governance, which is the system that helps firms control and direct operations, is in the spotlight as key parts of the governance framework such as audit and finance functions have failed to check the promoter-driven agendas.
The Smart Investor spoke to fund managers, CIOs and research heads to gauge the status of corporate governance practices prevailing in India, what could be done to improve the same and how all this will impact investors.
A well-balanced board of directors, proactive shareholders and swift action against malpractices could restore market confidence.
Role of the board
While there have been suggestions for a selection committee to choose independent directors, mandatory training, performance assessments, limit on directorships and compulsory attendance of Board meetings, two key areas relating to CEO/Board chair segregation and number of independent directors could be the right steps forward.
Role of auditors
A fallout of the Satyam case is the issue of delays involved in enforcement of Indian corporate laws. The need is to enforce corporate laws in a transparent, swift and uniform fashion. "Accountability and action against fraud/negligence are major concerns," believes N K Jain, secretary and CEO, Institute of Company Secretaries of India. "Professionals (auditors) should be made accountable and consequences (punishment) should follow if there are any deficiencies and slip-ups," he adds.
Says Anup Bagchi, executive director, ICICI [Get Quote] Securities, "While independent directors can certainly play an important role in ensuring better risk management, demand for good governance by institutional shareholders is the best driver towards higher governance standards." Establishing minority shareholders' groups can also be a positive step. Individual shareholders through these groups can communicate with institutional shareholders for taking up their concerns with the company's management.
While retail investors cannot bring about many changes to a corporate agenda, they can take precautions before making investments. Says Shailesh Haribhakti, executive chairman and managing partner, Haribhakti & Co, "The criteria of consistent track record, transparency in dealings with stakeholders, disclosure of all relevant information and accountability at levels of the organisation should help in making the investment decision."
While it might be difficult for retail investors to get hold of information on all aspects of the organisation they will be well served to keep an eye out for notes to the accounts. Says Holland, "Notes to the accounts are a useful source of information and reading them gives an idea of the exceptions or practices that the auditor has chosen to single out."
While our survey shows that experts believe that retail investors are indifferent about corporate governance, the Satyam episode will probably highlight 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 to companies with perceived corporate governance problems.
What is next
While the corporate governance framework in the country is seen at par with other developed markets, the same has to be implemented in 'letter as well as spirit'.
Additionally, shareholders should ensure that the composition of Board of Directors is a balanced mix of independent directors and management appointees. This would help keep a check on the internal processes of the company. With shareholder activism on the rise, the proactive role of institutional investors will also make the company management more accountable.
While things have improved substantially over the last five years, experts believe that more needs to be done, which will further improve disclosure levels and make managements accountable.
For now, the key concern for investors, says a fund manager is, "I will be worried if no action is taken against the culprits. While our compliance norms are the best in the world, we fail miserably on prosecution whereas in markets such as the US, action is swift and the penalties severe."
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