Home / Opinion / Online-views /  Enforcing corporate governance remains an unfinished agenda

Improving corporate governance standards has been a matter of priority for Indian policymakers over the past two decades. While scandals heightened awareness of corporate governance issues and public outcry forced the government to protect public interest and restore confidence in the market, the continuing impetus for corporate governance has been economic growth, the desire to remain competitive, international capital flow and growth of global financial market. Laws have been strengthened and regulation deepened to prevent further corporate misdeeds. The compliance regime has been tightened, and criminal and administrative penalties have been toughened. It can be stated that awareness of the importance of good corporate governance practices is now reasonably widespread.

Yet corporate misdeeds continue to stalk the country and make headlines every few months, each time in a different avatar. This only reinforces the view many experts hold that strong laws and tough regulation do not offer a complete solution to corporate governance issues.

There are many reasons why enforcement of corporate governance remains an unfinished agenda in the country. India has adopted international best practices, but their implementation, outside of their natural context, has remained problematic. In many respects, extreme measures have been introduced, such as the cap on number of drop down subsidiaries. Such extreme measures conflict with ease of doing business and lead to discontent in the corporate world. Regulatory competition has fragmented corporate law enforcement. Criminal sanctions provide strong deterrent value, but are subject to procedural delays of the court system because of the high burden of proof that is demanded. Regime of class action is underdeveloped. There are of course many other reasons.

An overly stringent legal and regulatory regime for corporate governance can also be counterproductive. In a way, some measures such as capping the number of drop-down layers of subsidiaries is no less than throwing the baby out with the bathwater, the baby here being the ease of doing business. The overarching objective for good corporate governance is to create incentives for the board and management to pursue objectives that are in the interest of the company and its shareholders under an effective monitoring mechanism. Corporate governance is aimed at lowering the cost of capital, encouraging more efficient use of resources and complimenting ease of doing business, thereby underpinning growth. The accountability regime has to be aligned with this objective.

While the efforts of the government in this area deserve an applause, it might be useful to pause, think, go back to the drawing board and start from the basics, of course, after wiping the board clean. Some grains of thoughts are stated below in brief.

• The qualities expected of a director need a rethink. For the corporate governance system to work, the directors must possess three fundamental qualities—integrity, courage and diplomacy. Integrity as a strong virtue of a director has been discussed adequately at length for years. This needs to continue to be reinforced. It takes courage and we have yet to see “courage" as one of the core qualities. Experience shows that directors are unable to muster courage to stand up and question. Many do, but only as a tick box to create a record that they were prudent in case the decision was to be questioned later. It is time courage is included as the core virtue expected from a director, with the warning that the faint-hearted need not apply. Diplomacy is also essential. No matter how brilliant and brave a director may be, the director will not be effective if he cannot communicate.

• The importance of a judgement by a director needs emphasis. This is the antithesis of—or perhaps the antidote to —“box ticking", or the formulaic compliances with standards, which has dogged the corporate governance debate. A director should be able to judge when to stake his reputation on the issue and resign, if necessary. Judgement, courage and conviction to do the right things are vital particularly when navigating complex and uncertain territory.

• Gatekeepers such as auditors, accountants, legal and financial advisors, and underwriters, among others, play an important role in corporate governance. Past scandals have consistently raised questions regarding the extent to which gatekeepers are fulfilling their promised functions. Too often, they have been seen as negligent and even complicit in corporate misdeeds. There is a need to encourage greater professionalism and hold them accountable for their actions as corporate advisors.

• Facilitating shareholder communication with the board is key. There is need to provide a contact person with whom shareholders may discuss any issue. In some countries, there is now an investment relations officer who reports directly to the board.

• Study the role of culture and societal issues in corporate governance.

• India has paved the way for scope of mediation in company law disputes. Mediation is cost-effective and timely, compared to litigation. Use of mediation should be encouraged in disputes that require creative remedies.

A deeper look into the challenges with the help of not just lawyers and corporate governance experts, but also social scientists, psychologists and philosophers, can help complete the unfinished agenda of corporate governance implementation.

Sumant Batra is managing partner at law firm Kesar Dass B. & Associates.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout