Posted by: CS Shilpi Thapar
As per research conducted by Department of Trade and Industry & King’s College, London, there are 18 drivers of good corporate governance:
1. Board Independence
2. Diversity, human and social capital within the board
3. High engagement in board processes
4. Presence of large block shareholders
5. Shareholder activism
6. Breadth and depth of public information disclosure
7. Breadth and depth of private information sharing
8. Independence of the external auditors
9. Competence of the audit committee
10. Presence of internal control systems and support of whistle blowing.
11. Long term performance-related incentives
12. Transparent and independent control of the remuneration committee
13. An active markets for corporate control
14. Transparency and protection for shareholders and stakeholders during mergers and acquisitions
15. Board power in takeover bids, subject to shareholder veto
16. Shareholder involvement within corporate governance
17. Voice mechanisms for debt holders
18. Employee participation in financial outcomes and collective voice in decision making.
The efficiency of corporate governance in a particular organization depends upon a combination of drivers. These drivers may substitute or complement each other in terms of their efforts on organizational outcomes including business strategy and performance.
As per my views, most important drivers of Good and Effective Corporate Governance system are :
1. Board Independence
2. Presence of large block shareholders i.e Institutional Investors
As far as Board Independence in the company is concerned, in practice it can be rarely noticed. Directors are mostly serving as Independent Directors on the Board of the Company from last 15-20 years and are just regarded as the expensive furniture of the company. There should be certain fixed term for independent directors otherwise, they would lose their independence.
There are more committees of Board and less commitment. The question arises: Do promoters who are leading corporates really understand the value of Corporate Governance Standards? , What is situation of Promoters Interests vs. Shareholders Interests and how it can be tackled? The conduct of Board Meetings is more important than the composition of Board of Directors. Board functioning is important rather than names of high profile candidates on Board.
Rise of Shareholder’s Activism is still a baby step in India. The shareholders are becoming more focused now. Some of the global examples of Share holders Activism are :
1. Apple agreed to investor demands requiring a majority share vote in order for any candidate to be elected to it s board of directors not just a simple majority.
2. Los Angeles County Employee retirement association or Lacera made it mandatory for all board of directors to elected annually.
3.Shareholder rejected CITI CEO Vikram Pandit’s $15 million compensation in non binding vote.
4.Merger of Sea Goa and Sterlite Industries
5.Coal India Vs. The Children Investment Fund
6.Veritas, Canadian Research Firm raised Corporate Governance and Accounting Practices issues at Reliance Industries, Reliance Communications, Kingfisher and most recently DLF.
7.SEBI mandated AMCs to disclose their general policies and procedures for exercising the voting rights in respect of shares held by them
More Institutional Investors should be involved. Proxy Voting Advisory firms is also emerging in India for eg. Institutional Investors Advisory Services, In govern Research Services.
In nutshell, Corporates and Board of Directors should have fear of law. There should be strong enforcement of laws and regulations to prevent corporate frauds. Fraud cases should be resolved swiftly by fast track redressal forums.