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India at the cutting edge of corporate governance
November, 29th 2010

The poignant question to be asked is how India can be at the cutting edge of corporate governance. There are no easy answers to this question. What with imploding institutional corruption in this country, can business be done without being affected by such corruption? Quite honestly, there is a vast segment of business which thrives on this murky aspect of national life. Corruption in its turn creates barriers to a level playing field. The other side of national corruption is the all pervading nepotism which stifles competition and merit. On the other hand, Indian enterprise is legendary. However, to be enterprising even if in a dishonest manner does not matter in India. To be successful is everything regardless of anything. This is the ascendant India whose fortunes are fast rising in the 21st century of economics.

While corruption is second nature to the dominant minority of about one million people, it could be said with some amount of accuracy that the majority of 999 million people of this country still exhibit the spirit of India of the hoary past. This is the uncompromising promise of the future India. Even after the several plunderers who invaded India and took away the country's legendary wealth, the great Indian spirit remains undiminished down the centuries to the present day. It is this legendary Indian spirit that can get us to the cutting edge of corporate governance.

The great principles of sovereign governance were well known in ancient India. It was not uncommon for a great emperor to trudge several miles through the jungles to seek enlightenment on sovereign governance from an austere guru. Ancient India revered such great gurus. Such gurus were embodiments of great wisdom and learning. If India has to achieve the cutting edge of corporate governance, it has to hark back to the great spirit of ancient India which was founded on dharma. No amount of law, regulations, enforcement can bring us to the cutting edge of corporate governance, without this spirit which some times means obedience to the unenforceable.

With the emerging scenario of economic renaissance in India, there is a possibility of economics overtaking politics. After some time, it is possible that economics may by and large get decoupled from politics. This is the best thing that could happen to India. In such a scenario, business may not necessarily need political patronage. This is the paradigm one can envision for India in the decades to come. This paradigm along with ancient spirit of India would create conducive conditions for this country to have the cutting edge of corporate governance.

To create wealth only an inclusive approach to corporate governance can sustain. For this inclusive approach the model of corporate governance should be such that it promotes the interests of all the stakeholders, namely, the employees, the customers, the lenders, the community and the shareholders.

Today, independence in corporate boards is a rare thing. Independent directors are galore by precept but are rare by practice. If board independence has to be ensured, the very appointment process of independent directors must change. Such appointments should not be the prerogative of the promoters of companies. Instead, a high-power nomination committee should recommend through an objective and transparent process the appointment of independent directors to the shareholders. The shareholders then should appoint the independent directors by postal ballot. Independent directors should be paid quite well and their tenure should not be more than two terms of three years each.

Auditors' pivotal role

Auditors play a pivotal role in ensuring good corporate governance. The Satyam fraud has thrown up questions about the institutional arrangements regarding the audit function. Today is a great opportunity for the auditing profession to rise to the occasion with a transformative change. This transformative change does not mean just a great change in the scope and depth of audit but a transformed approach and attitude to audit which is informed by intellectual honesty and professional independence. Rotation of auditors would happen and statutory internal auditors would also be required to be appointed by law. However, no amount of law and regulation can bring about this transformation except when independence in big matters is not sacrificed at the altar of expediency. Audit committees of corporate boards should compulsorily have at least one eminent chartered accountant as an independent member.

Whistle blowers

The whistle blowing mechanism should be statutorily reinforced so that whistle blowers do not pay with their lives as has happened in India in the last previous years. An anonymous whistle blowing mechanism should also be devised so that the perceived threat to the whistle blower is removed.

However, there could be some method of screening away frivolous acts of whistle blowing. All listed companies of certain size should have a sustainable whistle blowing policy. Informal whistle blowing should also be encouraged by the Chairman of the Audit committee.

Lack of shareholder activism results in poor corporate governance. All the institutional shareholders like investment institutions, mutual funds and others should be by law required to rate the investments also by the level of corporate governance in the invested companies and their corporate governance report should contain a meaningful reference to initiatives taken by them to ensure good corporate governance in the companies they have invested.

To facilitate shareholders activism derivative action should be put on the statute book so that deviant behaviour by companies is punished.

Class action which has been proposed by the Companies Bill, 2010, would not be meaningful in the context of India.

It is also important to have fast track corporate courts properly manned by competent personnel so that a sustainable corporate law justice system is put in place.

This century is a defining period for India. As India emerges as an economic power house, transformation would be the bye word. This transformation alone can take us to the cutting edge of corporate governance.

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