<p>Two decades back India was plagued by manipulative brokers taking advantage of clients, insider trading was rampant, companies engaged in profitable transactions with promoters and top managers, accounts were fudged to reflect false profits. <br /><br />With the advent of corporate governance rules under Clause 49 of the listing agreement of SEBI, the computerised National Stock Exchange and more oversight by the Registrars of Companies, the malpractices have reduced.<br /><br />However, the penal provisions are weak and rarely used. SEBI is only now reviewing whether it should continue giving ‘consent’ orders. The accused promoter and company pay a fine without admitting guilt and the matter is closed. Many serious violations have thus been covered up and the offenders are not even named. We do not have the speedy investigation, trial and stiff punishments we have seen in the USA with the prosecution of Raj Rajaratnam and his fellow insider traders.<br /><br />Private listed companies at least follow on paper the rules of corporate governance. Listed companies among state owned enterprises and even worse, the wholly owned public enterprises do not and when they do, it is cosmetic. Retired government servants are appointed as independent directors and on audit and remuneration committees where they passively agree to all government proposals. <br /><br />SEBI has rules and systems for accountability of the company’s management, owners to various stakeholders. Institutional mechanisms to be followed by each company include: appointment of independent directors who will fearlessly question management, an audit committee to scrutinise accounting policies and procedures and ensure transparency and fairness, a remuneration committee to decide on remuneration to the managing director and other top management, a nominations committee to propose new entrants to the board, and a shareholders’ grievances committee to ensure that shareholders’ complaints and grievances are dealt with satisfactorily.<br /><br /> Related party transactions have to be reported regularly. Good corporate governance aims to guarantee that the company is directed and controlled responsibly, professionally, and transparently. Essentially it is supposed to add to the confidence of the shareholders and investors, in the company. <br /><br />Indian private sector companies, even under dominant family ownership, follow SEBI clause 49 requirements. Some do it in name, not in deed. Independent directors are old friends (or celebrities). Sitting fees and prestige motivate many appointees. They do not want to jeopardise these by asking inconvenient questions. The majority shareholders run the company without any director querying them.<br /><br />Many private companies are transparent. Independent directors are fully informed. They find it useful and profitable to have such third parties who independently examine and advise on various matters relating to the company. Good corporate governance has helped to improve corporate performance. </p>.<p><br />Declining contribution<br /><br />The 2010-11 Public Enterprises Survey shows that the Central government owned public enterprises made a declining contribution to GDP. Their growth was slower than the rest of the GDP. There are no truly ‘independent’ directors to protest at this erosion in the value of their companies. Minority shareholders have not exercised themselves over their loss. The Indian citizen, (the true majority shareholder, unlike the joint secretary in the ministry who controls the enterprise), and his legislative representatives, neither understand or are interested.<br /><br />Coal India Limited has private shareholders including a British investment fund. The fund protested when government imposed a supply obligation on Coal India. Independent directors had earlier protested. Clearly this is antipathetic to principles of corporate governance and against the shareholder interest.<br /><br />Coal India is an inefficient company that could mine more coal at lower costs if there was enough motivation to use technology and incentives. But it is an unregulated state monopoly that has depressed power and fertilizer production and the nation’s economic growth. <br /><br />Apart from governance, all public enterprises (central and state) suffer from the interference in all major managerial decisions by the all-knowing generalist bureaucrat. Major decisions are not left to the management and the Board of Directors.<br /><br />A glaring example is the merger of Indian Airlines with Air India. There was little or no prior preparation. Consequent human relations problems stultified the merger in practice. On the other hand, a well-governed and managed Mahindra merged Mahindra Tech and Satyam, within two years and the merged company is now a superior performer.<br /><br />In management, government overruled Air India management and substantially increased the number planes ordered, committing Air India to a huge debt. There was no utilisation plan. Instead, many lucrative routes were given away to domestic and foreign airlines. Clearly, good corporate governance and management autonomy without bureaucratic interference would not have landed the nation in this costly mess. in these airlines. Ministers and bureaucrats took the managerial decisions with vested interests guiding them. </p>.<p><br />Many unsuccessful attempts have been made to distance ministries and bureaucrats from public enterprises. But professional managers are subservient to their controlling bureaucrats. They need autonomy in major decisions on strategy, investment, diversification, pricing, marketing, top appointments, etc.</p>.<p><br />Good corporate governance will safeguard minority shareholder interests and improve performance. Managerial autonomy will enhance performance further. The best answer is to free national resources locked up in public enterprises and improve their productive contribution to the nation by freeing them from government ownership<br /><br />. Until governments muster political will to do that, they should strictly follow the rules of corporate governance. </p>
<p>Two decades back India was plagued by manipulative brokers taking advantage of clients, insider trading was rampant, companies engaged in profitable transactions with promoters and top managers, accounts were fudged to reflect false profits. <br /><br />With the advent of corporate governance rules under Clause 49 of the listing agreement of SEBI, the computerised National Stock Exchange and more oversight by the Registrars of Companies, the malpractices have reduced.<br /><br />However, the penal provisions are weak and rarely used. SEBI is only now reviewing whether it should continue giving ‘consent’ orders. The accused promoter and company pay a fine without admitting guilt and the matter is closed. Many serious violations have thus been covered up and the offenders are not even named. We do not have the speedy investigation, trial and stiff punishments we have seen in the USA with the prosecution of Raj Rajaratnam and his fellow insider traders.<br /><br />Private listed companies at least follow on paper the rules of corporate governance. Listed companies among state owned enterprises and even worse, the wholly owned public enterprises do not and when they do, it is cosmetic. Retired government servants are appointed as independent directors and on audit and remuneration committees where they passively agree to all government proposals. <br /><br />SEBI has rules and systems for accountability of the company’s management, owners to various stakeholders. Institutional mechanisms to be followed by each company include: appointment of independent directors who will fearlessly question management, an audit committee to scrutinise accounting policies and procedures and ensure transparency and fairness, a remuneration committee to decide on remuneration to the managing director and other top management, a nominations committee to propose new entrants to the board, and a shareholders’ grievances committee to ensure that shareholders’ complaints and grievances are dealt with satisfactorily.<br /><br /> Related party transactions have to be reported regularly. Good corporate governance aims to guarantee that the company is directed and controlled responsibly, professionally, and transparently. Essentially it is supposed to add to the confidence of the shareholders and investors, in the company. <br /><br />Indian private sector companies, even under dominant family ownership, follow SEBI clause 49 requirements. Some do it in name, not in deed. Independent directors are old friends (or celebrities). Sitting fees and prestige motivate many appointees. They do not want to jeopardise these by asking inconvenient questions. The majority shareholders run the company without any director querying them.<br /><br />Many private companies are transparent. Independent directors are fully informed. They find it useful and profitable to have such third parties who independently examine and advise on various matters relating to the company. Good corporate governance has helped to improve corporate performance. </p>.<p><br />Declining contribution<br /><br />The 2010-11 Public Enterprises Survey shows that the Central government owned public enterprises made a declining contribution to GDP. Their growth was slower than the rest of the GDP. There are no truly ‘independent’ directors to protest at this erosion in the value of their companies. Minority shareholders have not exercised themselves over their loss. The Indian citizen, (the true majority shareholder, unlike the joint secretary in the ministry who controls the enterprise), and his legislative representatives, neither understand or are interested.<br /><br />Coal India Limited has private shareholders including a British investment fund. The fund protested when government imposed a supply obligation on Coal India. Independent directors had earlier protested. Clearly this is antipathetic to principles of corporate governance and against the shareholder interest.<br /><br />Coal India is an inefficient company that could mine more coal at lower costs if there was enough motivation to use technology and incentives. But it is an unregulated state monopoly that has depressed power and fertilizer production and the nation’s economic growth. <br /><br />Apart from governance, all public enterprises (central and state) suffer from the interference in all major managerial decisions by the all-knowing generalist bureaucrat. Major decisions are not left to the management and the Board of Directors.<br /><br />A glaring example is the merger of Indian Airlines with Air India. There was little or no prior preparation. Consequent human relations problems stultified the merger in practice. On the other hand, a well-governed and managed Mahindra merged Mahindra Tech and Satyam, within two years and the merged company is now a superior performer.<br /><br />In management, government overruled Air India management and substantially increased the number planes ordered, committing Air India to a huge debt. There was no utilisation plan. Instead, many lucrative routes were given away to domestic and foreign airlines. Clearly, good corporate governance and management autonomy without bureaucratic interference would not have landed the nation in this costly mess. in these airlines. Ministers and bureaucrats took the managerial decisions with vested interests guiding them. </p>.<p><br />Many unsuccessful attempts have been made to distance ministries and bureaucrats from public enterprises. But professional managers are subservient to their controlling bureaucrats. They need autonomy in major decisions on strategy, investment, diversification, pricing, marketing, top appointments, etc.</p>.<p><br />Good corporate governance will safeguard minority shareholder interests and improve performance. Managerial autonomy will enhance performance further. The best answer is to free national resources locked up in public enterprises and improve their productive contribution to the nation by freeing them from government ownership<br /><br />. Until governments muster political will to do that, they should strictly follow the rules of corporate governance. </p>
