CORPORATEGOVERNANCEIN INDIA

Meaning:
The World Bank has defined corporate governance as, "the blend of law, regulation and
appropriate voluntary private sector practices which enables the corporation to attract
financial and human capital, perform efficiently and thereby perpetuate itself by
generating long-term economic value for its shareholders, while respecting the interests
of stakeholders and society as a whole".

Corporate governance is identified with shareholder activism and to make top executives
more accountable. It should motivate both the board members and employees. It is the art
of governing so as to maximise the welfare of the company.

The need for corporate governance in India:

(1) The feudal mindset is prevailing in India. We have come to the times of corporate
throne from the times of proverbial throne. The progeny should control the throne cannot
work well with corporate world.
(2) There are so many rules, regulations, and restrictions in India and naturally people
evade rules.
(3) Many people in India do not have concerns. According to Aristotle a good man
should also be a good citizen. Many good people are not becoming good citizens.
(4) There is a sense of insecurity in India among the stakeholders. These people require a
sense of confidence.
(5) There is a lot of greed and ego. Short cuts and violation of laws have become
increasing in magnitude.

Hence corporate governance is no longer a luxury but a necessity in India.

Three different models of corporate governance in India:

India has so far three models of corporate governance.
(1) The Managing Agency Model (1850-1956):
Under this model, the managing agents who were individuals or firms managed the joint
stock companies. The British merchants were the first managing agents. The managing
agents with their rich resource base developed jute, coal and tea industries in India. They
promoted new companies. They managed the then existing companies. They also
provided important financial functions. After independence, this model was discouraged
and given up.

(2) The Business House Model (1956-1991):

The basis for this model is the promotion of economic development and welfare state
schemes. While the public sector played an important role, the private sector also had its
own importance also in the development of the economy. The Companies Act of 1956
laid the foundation for this model. The role of the board of directors was governance and
management was responsible for the day-to-day operations of the firm. Many corporate
decisions had to get the approval of the government. The appointment of a nominee
director enabled banks and other financial institutions to protect their interests.
Restrictions of imports, promotion of exports, regulation of foreign exchange, promotion
of infrastructure and nationalization of some industries are the measures for the
promotion of economic development.
Growth of public sector, restrictions of monopolistic practices and encouragement of
small scale industries control economic concentration.

(3) The Anglo - American Model of Governance (1991 to date):

This model promoted privatization and liberalisation of Indian economies. These
programmes involved marketisation and deregulation.
Market has been given a greater role in solving the economic problems. Deregulation has
encouraged the substantial withdrawal of the state from many economic and social
activities.
This model has encouraged a mix of both inside and outside directors. The role of the
nominee directors has been weakened.
Some changes have taken place in the circumstances of governance. SEBI has been
established to determine the stock prices on the basis of market forces. Investors enjoy
greater protection.
Liberalisation has taken in the banking sector like the simplification of interest rates,
encouragement of private banks and MOU between banks and the RBI.
Another key initiative is the development of Economic Value Added (EVA) which
attempts to reflect the difference between a company's accounting profit and the cost of
capital. This will indicate whether the invested capital has been efficiently utilized. It is
an indication of the addition to the market value of capital.
The Anglo-American model aims at promoting meaningful employment to people. The
growth of private sector labour market in India is an evidence of the success of this
model.
Transparency has increased and the control by shareholders is improving.

Recommendations of CII Report on corporate governance:

The confederation of Indian Industry has given the following suggestions:
(1) The full board should meet at least six times a year at an interval of two months. Each
meeting should have an agenda of times which require at least half a day's discussion.
(2) Any listed company with a turnover of Rs. 1 billion 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 M.D. is the same person.
(3) No single person should be a director in more than ten companies.
(4) The non-executive directors should play an important role in corporate decision
making and maximising long term shareholder view. They should be active participants
on the board and should have the requisite knowledge to read financial statements.
(5) The non-executive directors should be given sitting fees and stock options.
(6) The reappointment of directors should be based on the attendance and performance of
the directors.
(7) The following information should be reported and placed before the board:
• Annual operating plans and budgets.
• Capital budgets, manpower and overhead budgets.
• Quarterly results for the company.
• Notices from others received by the company.
• Defaults.
• Details of joint venture.
• Transactions made for achieving good will, brand equity and acquiring intellectual
property.
• Labour problems and their proposed solutions.

Recommendations of Kumar Mangalam Birla Committee on

Corporate Governance
(1) The board should have an optimum combination of executive and non-executive
directors.
There should be at least 50 percent of the board should be non-executive directors.
(2) A qualified and independent "Audit Committee" should be set up by the board of the
company.
(3) The board should set up a "Remuneration Committee" to determine the specific
remuneration packages for executive directors.
(4) A committee should be set up to look into shareholder issues and redressal of
complaints.
(5) All payments made directors should be disclosed in the corporate governance section
of the annual report.
(6) There should be at least four board meetings a year with a maximum time gap of four
months between any two meetings.
(7) All company related information should be available in company's websites.
(8) Disclosures should be made relating to all material, financial and commercial
transactions.
Corporate governance has become a necessity for the following
reasons:
(1) Spread of globalisation and liberalisation.
(2) Increased concern for the welfare of employees.
(3) Increasing demands of the customers.
(4) Growth of co-operation and collaborations.
(5) Wish of the investors.

Two general models of corporate governance:

(1) The control model of developing countries has the following features:
• Concentrated ownership.
• Insider boards.
• Limited disclosures.
(2) The market model of developed countries has the following features:
• Dispersed ownership.
• High disclosure.
• Equity market.

Mistakes of Directors in India:

(1) Failure to document the reasons for the decision taken.
(2) Failing to seek the expertise of experts and consultants.
(3) Not exercising all the time, the duty of care and loyalty, the two components of
corporate governance.
(4) Lackof professional approach.

Some bad practices in India:

(1) CEOconsiders the Board as a necessary evil and a burden to management.
(2) Management keeps the Directors in dark.
(3) Rigid agendas and formal meetings.
(4) Norms of boardroom debates are violated. Aggression and isolation are common
features.

Suggestion of good practices:

(1) Independence to all the Directors.
(2) Healthy and useful Board meetings.
(3) Optimum size of the board.
(4) A charter outlining responsibilities.
(5) Orientation and training for directors.
(6) Commitment ohime and energy.
(7) Active non-executive directors.
(8) Powerful audit committee.
(9) Rule of law.
(10)Consensual in orientation.

Conclusion:
Accountability, transparency, predictability and participation are the cornerstones of
corporate governance. It should have a concern for future and promote healthy
competition. Kautilya the great Indian political strategist said, "In the happiness of his
subjects, lies the king's happiness; in their welfare, his welfare". This ancient wisdom can
be very well applied to the modern corporate world.
Corporations are expected to behave as good corporate citizens. The economy provides
the corporations with a sanction to operate and these corporations should use this as an
opportunity to develop the economy by following sane and sound practices.

Summary
(1) Meaning of corporate governance.
(2) The need for corporate governance in India.
(3) Three different models of corporate governance in India
(a) Managing Agency Model.
(b) Business House Model.
(c) Anglo - American Model of Governance.
(4) Recommendations of CII Report.
(5) Recommendations of Kumar Mangalam Birla committee.
(6) Two general models of corporate governance.
(7) Mistakes of directors in India.
(8) Some bad practices in India.
(9) Suggestion of good practices.

Questions
Section 'A'
(1) Define corporate governance.
(2) Mention the three different models of corporate governance in India.
(3) What is the Anglo - American Model of Governance?
Section 'B'
(1) Explain the need for corporate governance in India.
(2) What are the recommendations of CII Report on Corporate Governance?
(3) Discuss the recommendations of Kumar Mangalam Birla Committee on Corporate
Governance.
(4) Suggest good practices of corporate governance in India.

Section 'e'
(1) Examine the problems of corporate governance in India. Suggest practical steps for
the good corporate governance in India.