The ICSI does not rank companies for corporate governance
December, 21st 2006
Corporate behaviour is a derivative of socio-economic perspectives of the country as well as globalisation. Legislation definitely helps in stimulating good corporate behaviour, by specifying norms in this respect. MR H. M. CHORARIA, PRESIDENT, ICSI
Corporate governance is a phrase that remains a fuzzy one for most of us though we keep hearing a lot about it. This weekend will see more action on the CG front, with the Institute of Company Secretaries of India (www.icsi.edu) announcing this year's `national award for excellence in corporate governance'. In this context, Business Line interacted with Mr H. M. Choraria, president of the Institute, to know more about the concept. Here is his take on a few questions on corporate governance.
First, do we have a comprehensive law governing corporate governance? Does everything begin and end with Clause 49?
The country has a comprehensive law governing corporate governance. Clause 49 is not the only legislation on governance. In fact, the Companies Act, 1956 itself covers corporate governance widely through its various provisions such as inclusion of directors' responsibility statement in the directors' report under Section 217(2AA), constitution of audit committee under Section 292A, fixing maximum ceiling on remuneration that can be drawn by a director under Schedule XIII, and those relating to oppression, mismanagement, etc. Further, environmental and other pieces of legislation also protect different stakeholders' interest, ensuring, in the process, good corporate governance.
What are the key aspects of the clause that help improve corporate governance? Has the clause helped Indian companies achieve a higher level of corporate governance?
The key aspects include composition of the board with optimum number of independent directors, constitution of audit committee with the chairman being an independent director, laying down a code of conduct for board members, mandatory disclosures on related party transactions, risk management, certification on financial statements and internal controls by the CFO (chief financial officer), mandatory reporting on corporate governance along with annual report, etc.
These definitely enhance investors' and other stakeholders' confidence in Indian companies.
How many corporate governance reports have been signed this year by practising company secretaries? What has been the feedback from members?
Clause 49 is applicable to all listed companies having a paid-up capital of Rs 3 crore and above or a net worth of Rs 25 crore or more at any time in the history of the company. The corporate governance report of a company to which Clause 49 is applicable can be certified by a practising company secretary. The Institute has about 3,500 practising members and they are actively involved in certifying and enriching the corporate governance reports of listed companies. Being one of the value-adding areas for practising company secretaries, the feedback from the members has been quite positive .
Following the requirements of SOX , 15-20 per cent of large companies in the US reported weaknesses in their internal controls. We have not had any such report of significant weaknesses closer home. Are we better governed?
We have an effective system of maintaining internal control and identifying weaknesses. For example, as per Clause 49, a CEO/CFO has to certify to the board that he accepts the responsibility of maintaining the internal control and of its effectiveness. He also has to certify the significant changes in the internal control systems.
Further, the clause requires the audit committee to review the information on internal control weakness identified by statutory auditors and entails a company to include management discussion and analysis report as a part of the annual report, wherein the internal control system and its adequacy are to be specified. A practising company secretary certifying a corporate governance report also ensures that there has been effective evaluation and reconstruction of internal controls, thereby, helping in better management of internal risks. All these ensure better governance.
Corporate governance report in its present form does not refer to quality of numbers in the financial statements. Do you see that as a lacuna?
The purpose of corporate governance report is to bring about better governance by having an optimum composition of the board, laying down a code of conduct for the directors, calling for certain disclosures and making the internal control systems effective. Once the desired corporate governance system is in place, it automatically take care of the qualitative aspects.
It is often debated whether a US-style rule-based form of governance or a European-style principles-based one is more effective? Which of these suits India?
Corporate governance is not a one-size-fits-all concept. India has its own norms for bringing better governance. These norms came about after much brain storming by, among others, the Kumaramangalam Birla and Narayana Murthy committees.
Are independent directors truly independent in India? Given the shortage of quality independent directors and financial experts, what is the ICSI's solution?
Yes, eligibility of an independent director is clearly defined in the statute. The ICSI has its own database for identifying independent directors and our members are competent enough to act as independent directors, who can surely add value to good governance practices.
Does the definition of independent directors require a change?
The only change ICSI has made is to exclude nominee directors representing sectional interests from the definition of independent director.
Many companies are reluctant to have `real independent directors'. Your views.
There is no term like `real independent director'. All the independent directors are appointed only in compliance with Clause 49 of the listing agreement, as defined by SEBI.
What do you think is the incentive to attract independent directors?
Apart from good compensation, independent directors have greater opportunity to provide objectivity and expertise in the decision-making process of the company.
How effective are audit committees? Can their effectiveness be improved?
As the composition of an audit committee requires at least two-thirds of its members being independent, all members being financially literate and the chairman being a finance expert, audit committees truly contribute to better governance.
Indian businesses are significantly family-owned. How would an independent board operate when all powers to appoint, remunerate and remove are in the hands of the family?
The law is uniformly applicable to companies irrespective of their nature. The role of independent directors will, therefore, not be affected in family-owned businesses.
Is corporate social responsibility (CSR) just a buzzword, or do companies truly go beyond charity and help all stakeholders? What has been your experience?
Worldwide, CSR is becoming a must for corporations and businesses have understood that unless and until they ensure sustainable growth, society in the long term would not accept their products/services. At the same time, a company, being an organisation within society, definitely has a contributory role to play in welfare and development. CSR is not just a buzzword.
Do boards of today take more responsibility and liabilities than in the past? How should the risks and rewards for directors be equitably discharged?
Yes, directors do take more responsibility than in the past and this is ensured through the role of various committees and mandatory disclosures and certifications. Yes, risks and rewards relating to directors are a subject of concern, which requires more research.
There are a number of factors in corporate governance that are not quantifiable. How do you evaluate these for rankings and awards? Or, is the ranking subjective?
The ICSI has consistently refused to rank companies for corporate governance. Its award process judges but does not rate companies for their governance performance.
Is the corporate governance compliance we see around us in letter or in spirit?
The word governance always implies positives and compliance is through implementing good corporate governance. We can see the difference in today's corporate world vis--vis what prevailed earlier.
How can good corporate behaviour be stimulated? Would legislation help?
Corporate behaviour is a derivative of socio-economic perspectives of the country as well as globalisation. Legislation definitely helps in stimulating good corporate behaviour, by specifying norms in this respect.
Lastly, do corporate governance, transparency and disclosure pay?
Yes. It is a must for Corporate India to implement governance if it is to command resources and markets in the global economy.