Corporate Governance

Abstract

Weak corporate governance has been singled out as the leading cause for recent high profile cases of corporate fraud. There is a growing demand for corporates to be more transparent and accountable in their dealings with their stakeholders and the community at large. In recent times, especially after the liberalisation of the Indian economy in 1991, a large number of Indian companies have been raising capital overseas by getting listed on international stock exchanges. This is in tune with the efforts of Indian government to attract more foreign direct investment (FDI) into India. This fact is accompanied with the realisation that if Indian companies want more access to global capital markets, they need to make their operations and financial results more transparent, that is, improve their standards of corporate governance.

The Securities and Exchange Board of India (SEBI), which regulates India’s stock markets, had initially mandated the adherence to clause 49 of corporate governance for all listed companies from 1 April 2004. However, after wide public outcry against the provision, in its original form, SEBI had constituted a committee on corporate governance under the Chairmanship of Mr. N. R. Narayana Murthy. Based on the recommendations of the committee and public comments received, certain amendments were made in Clause 49 of the Listing Agreement (http://www.sebi.gov.in/commreport/clause49.html). Clause 49 is basically a regulation that calls for an increase in the number of independent directors serving on the boards of large Indian companies to ensure more transparency and better accountability. The modified clause 49 came into effect from 1 January 2006, and all listed companies were mandated to adhere to it with effect from 1 April 2006 (http://www.sebi.org/).

It is thus expected that all sample companies would be following the corporate governance rules and regulations rigorously, indicating a high degree of professionalism, financial transparency and discipline in their management ethos. This may also be naturally expected as the sample companies are amongst the largest companies in the country and are answerable to a vast number of stakeholders.

This aspect, thus, necessitated inquiry. This modest attempt focuses on ascertaining the status of adherence to corporate governance regulations amongst the sample companies. It is worthwhile to mention here that this is perhaps the first attempt of its kind in recent times especially, since it is based on valuable primary data.

All in all, it appears that the sample companies do adhere to certain aspects of corporate governance but not in its entirety. This is an area of concern, since, as mentioned earlier, the sample companies are amongst the largest companies in the country and, as such, are responsible to a large number of stakeholders. In that respect, they have a larger image to protect. At the time of writing this monograph, 6 years have passed since the date when clause 49 became mandatory. Companies have had adequate time to set up corporate governance structures and practices. The possible reasons for the continuing lacuna on certain aspects could be the limited availability of independent directors in the country and also the process of cultural change.

However, it is important that the Indian corporates regard the issue of governance not as an irritant or impediment but as an essential mechanism for their very survival in the new economic environment. Also, good corporate governance is reported to indicate better valuations for the companies. The sample companies, thus, would do well to be more serious and professional about adopting and practising good corporate governance.