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Corporate Governance in India: Aims and Objectives

Corporate governance, in plain terms, refers to the rules, processes, or laws by which

businesses are operated, regulated, and controlled. The term can refer to internal factorsdefined by the officers, stockholders or constitution of a corporation, as well as to externalforces such as consumer groups, clients, and government regulations.However, an enforced corporate governance provides a structure that, at least in theory,works for the benefit of everyone concerned by ensuring that the enterprise adheres toaccepted ethical standards and best practices as well as to formal laws. To that end,organizations have been formed at the regional, national, and global levels.In recent times, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminalactivity by corporate officers. An integral part of an effective corporate governance regime

includes provisions for civil or criminal prosecution of individuals who conduct unethical or

illegal acts in the name of the enterprise.Aims and Objectives

It is said that good corporate governance helps an organization achieve several objectives

and some of the more important ones include: Developing appropriate strategies that result in the achievement of stakeholder objectives Attracting, motivating and retaining talent Creating a secure and prosperous operating environment and improving operational

performance Managing and mitigating risk and protecting and enhancing the companys reputation.Some aspects covered in the poll include: Corporate governance regulations in India Corporate governance concerns in India and role of independent directors and auditcommittees inaddressing these concerns Board practices, board oversight of risk management and the importance given tointegrity and ethicalvalues Practices that are fundamental to improved corporate governance.In comparison with developed countries that impose stringent penal and criminal

consequences for poor corporate governance, penalty levels in India are considered to beinadequate to enforce good governance. 71 percent of the respondents considered penalty

levels to discipline poor and unethical governance to be low. 22 percent of the respondentswere either undecided or did not know if the penalty levels are low.Enforcing Clause 49 this topic is important to understand.Read it carefullyIn recent years, more and more Indian companies have been raising capital overseas bygetting themselves listed on international stock exchanges. These efforts have been

accompanied by the Indian government's drive to attract more Foreign Direct Investment(FDI). Both factors have gone hand in hand with the realization that if Indian companies

want more access to global capital markets, they will need to make their operations andfinancial results more transparent. In other words, they will need to improve their standardsof corporate governance.The Securities and Exchange Board of India (SEBI), which regulates India'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 that strengthens the role of independent directorsserving on corporate boards. Have these steps made a difference to corporate governance

in Indian firms?Corporate Social Responsibility

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Corporate Social Responsibility (CSR) is a concept through which organizations consider the

interests of society by taking responsibility for the impact their activities have on customers,

suppliers, employees, communities and the environment. This responsibility goes beyondcompliance with regulations and is about organizations voluntarily taking further steps to

improve the quality of life for employees as well as for the local community and society atlarge.47 percent of the respondents believe that CSR is not high on the agenda of Indian

companies. Thirty percent of the respondents were undecided on this aspect.Integrity and Ethical ValuesIndian companies have been focusing on code of conduct and whistle blower mechanism asa fundamental of good governance. Respondents were asked if similar importance was

given to integrity and ethical values. Majority of the respondents say that although Indian

companies give similar importance to integrity and ethical values, significant scope exists toenhance integrity and ethical values within the organization and the eco-system.Effectiveness of Corporate Governance

Monitoring the effectiveness of corporate governance practices is also a key conceptemerging in India. We asked respondents who should monitor the effectiveness of corporategovernance practices. Forty-seven percent of the respondents believe that effectiveness of

corporate governance should be monitored by way of corporate governance audits carried

out by corporate governance specialists. Twenty-six percent of the respondents believe that

it should be monitored by the boards themselves through self-assessment tools. Fifteenpercent of the respondents believe that the monitoring should be by way of investors /

minority shareholder groups having access to full information and another 12 percentbelieved that the monitoring should be through rating agencies.Factors To Improve Corporate Governance

85 percent of the respondents think that the remuneration of Chief ExecutiveOfficers (CEO) should be significantly linked to company performance Most respondents believe that while steps at introducing the code of conductand whistle blower policy have been introduced, there exists a significant needto enhance integrity and ethical values in the larger eco-system 72 percent of the respondents believe it is necessary for an independent andtransparent process to evaluate performance of board members Two-thirds believe that exclusive sessions of independent directors are essential 47 percent feel that the effectiveness of corporate governance should bemonitored through audits by corporate governance specialists.Governments InitiativesThe Ministry of Corporate Affairs has proposed the New Companies Bill 2008 which aims to

improve corporate governance by vesting greater powers in shareholders. These have beenbalanced by greater emphasis on self-regulation, minimization of regulatory approvals and

increased and more transparent disclosures. 53 percent of the respondents believe that thenew Companies Act might have a limited or insignificant impact in addressing contemporary

corporate governance issues in India. 28 percent of the respondents believe that its impactis likely to be positive. The remaining 19 percent were undecided.In October 2011, the Ministry of Corporate Affairs said it was in favor of introducing a

corporate governance index that would offer rankings to companies adopting governancestandards. The index would offer rankings for corporate houses adopting governancestandards.The Ministry was keen to introduce a corporate governance policy to take forward thegovernment's efforts towards better governance in companies. It had been worked out andthe competition law would be revisited and amendments would be introduced soon.Supreme Courts VerdictIn May 2011, the Supreme Court has given a very fair judgment, with far-reachingimplications both for the government and India Inc., in the Reliance Industries Limited (RIL)

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vs RNRL gas pricing case. It has established unequivocally that the production sharing

contract between the government and RIL overrides any private memorandum of

understanding arrived at between two individuals. In short, it refused to give sanctity to theMemorandum of Understanding (MoU) signed between the two Ambani brothers. This

principle had to be established in the interest of corporate governance or it would havecreated havoc in the corporate world with promoters of public limited, quoted companies

coming together and signing MoUs without a care for the shareholders and other stakeholders in the company. Till today the shareholders have not okayed the MoU entered into

between Mukesh and Anil Ambani when they divided between themselves the empirecreated by their father, Dhirubhai Ambani.The second important aspect of the judgment is

that the natural resources of a country belong to the government and the government has

the right to price it and prioritize the beneficiaries. While it is a well known fact, eveninternationally, that natural resources belong to the government, the government as a

monopoly has the sacred responsibility to put the interest of the nation before everything

else when deciding on its use and sale price. This is where the judgment has implicationsthat go beyond the Ambani brothers. The petroleum minister has expressed his happinessthat the apex court has upheld his contention that the gas in this case belongs to the

government and RIL is only a contractor who can market the product. But it will be the

government that will decide at what price it should market it, and to whom it should market

it. This is a double-edged sword.