Emerging Concept of Corporate Governance

"In recent years, there have been perceptible changes in the corporate ownership on account of exponential growth of capital market activities, and active monitoring of corporate activities by financial institutions. The globalization efforts have rendered overall corporate scenario complex and challenging necessitating urgent review of the system of corporate governance with particular emphasis on reporting and accountability, the role of financial institutions, non-executive directors, managing directors, chairman and audit committee, and the relationship between stock exchanges and companies and also companies and investors.

"Corporate Governance, a phenomenon of recent origin in the wake of increasing competition and globalization, stipulates parameters of accountability, control and reporting functions of the Board of Directors and encompasses the relationship among various participants in determining the direction and performance of the corporation, the Board, management team, shareholders and other stake-holders"
[Source: address delivered by Shri Vepa Kamesam, Dy. Governor, RBI at Administrative Staff College of India, Hyderabad]

Indian Banks over a period of two decades after nationalisation blindly adopted an external approach in the era social banks and totally ignored concern towards of internal health and stability, in particular in the domain of risk assessment and risk-management, profitability, capitalisation, & maintaining asset-quality. Reforms have freed them from super-imposed control and directed banking activities. Banks today have freedom, but needs guidance on direction for adoption of globally recognised best practices.

"The major challenge of the reform has been to introduce elements of market incentive as a dominant factor gradually replacing the administratively coordinated planned actions for development. Such a paradigm shift has several dimensions, the corporate governance being one of the important elements. The evolution of corporate governance in banks, particularly, in PSBs, thus reflects changes in monetary policy, regulatory environment, and structural transformations and to some extent, on the character of the self-regulatory organizations functioning in the financial sector." (Dr. Y.V. Reddy, Deputy Governor, Reserve Bank of India,)

Realising the importance and indispensability of adoption of standards of Corporate Governance for the sustained growth of banks and other corporate organisations, different regulatory bodies took interest to evolve suitable models.

The project on Corporate Governance relating to Banks in India is part of the main project "Indian Banking Today & Tomorrow" and aims to catalogue the different models on Corporate Governance developed by organisations like SEBI, RBI, DCA. Rightly it starts with how the concept gained importance and its basic ingredients. The project is divided into 5 modules as under:

1. Module: 1 - Corporate Governance - General Features - 7 articles

   The module explains the concept and traces its emergence in the thinking of regulatory bodies overviewing corporate management. It then traces the evolution and development of this concept in the Indian horizon.

2. Module: 2 - Corporate Governance in Banks (6 articles)

   This module analyses the need for application of principles and best practices of corporate governance in the management of banks/financial institutions and presents the respective models of corporate governance advocated by the World Bank and the Basel Committee of International Bankers. The modle also includes an article (covering two pages) by Dr.Y.V.Reddy, Dy.Governor, RBI about assessment of Corporate Governance in PSBs.

3. Module: 3 - The Report of the Consultative Group of Directors of Banks/Financial Institutions (Chairman Dr A S Ganguly) - (10 articles)

   RBI as the regulator of banks in India has felt the need for formulating suitable model of corporate governance to be practised by the banks in India by streamlining and making effective the functioning of the Board of Directors of respective banks. RBI in this context appointed an expert committee under the chairmanship of Dr A.S. Ganguly, Director, Central Board of RBI, to make recommendations towards the more effective functioning of bank boards. The Group was to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-�-vis compliance, transparency, disclosures, audit committees etc. and submit recommendations for making the role of Board of Directors more effective with a view to minimising risks and over-exposure. The module covers the several recommendations of this Committee.

4. Module: 4 - Mohan Kumar Mangalam Committee Report (14 articles)

   SEBI, as the custodian of investor interests, on its part constituted an 18-member committee on May 7, 1999, chaired by the young and forward-looking industrialist, Mr. Kumar Mangalam Birla (a chartered accountant himself), on Corporate Governance, mainly with a view to protecting the investors' interests. The Committee made 25 recommendations, 19 of them `mandatory' in the sense that these were enforceable. The listed companies were obliged to comply with these on account of the contractual obligation arising out of the listing agreement with Stock Exchanges. The module exhaustively describes the recommendations of Mohan Kumaramangalam Committee.

5. Module: 5 - Initiative of DCA - Naresh Chandra Committee Report on Corporate Governance
   (7 articles)

   More recently, the first major stimulus for corporate governance reforms came after the South-East and East Asian crisis of 1997-98. This was no classical Latin American debt crisis. Here were fiscally responsible, healthy, rapidly growing, export-driven economies going into crippling financial crises. Gradually, governments, multilateral institutions, banks as well as companies began to understand that the devil lay in the institutional, microeconomic details - the nitty-gritty of transactions between companies, banks, financial institutions and capital markets; the design of corporate laws, bankruptcy procedures and practices; the structure of ownership and crony capitalism; sharp stock market practices; poor boards of directors showing scant regard to fiduciary responsibility; poor disclosures and transparency; and inadequate accounting and auditing standards. Suddenly, 'corporate governance' came out of dusty academic closets and moved centre stage.

   Just as the global corporate governance movement was going into a bit of hibernation, there came the Enron debacle of 2001, followed by other scandals involving large US companies such as WorldCom, Qwest, Global Crossing, and the exposure of auditing lacunae that eventually led to the collapse of Andersen. Having shaken the foundations of the business world, that too in the citadel of capitalism, these scandals have triggered another more vigorous phase of reforms in corporate governance, accounting practices and disclosures - this time more comprehensively than ever before. As a US- based expert recently put it, "Enron and WorldCom have done more to further the cause of corporate transparency and governance in less than one year, than what activists could do in the last twenty."

   Although India has been fortunate in not having to go through the pains of massive corporate failures such as Enron and WorldCom, it has not been found wanting in its desire to further improve corporate governance standards. On 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs appointed the Naresh Chandra Committee to examine various corporate governance issues. This module presents the different recommendations of the Naresh Chandra Committee.

6. Module: 6 - Report of Narayana Murthy Committee on Corporate Governance (7 articles)

   SEBI believes that efforts to improve corporate governance standards in India must continue. This is because these standards are themselves evolving, in keeping with market dynamics. Recent events worldwide, primarily in the United States, have renewed the emphasis on corporate governance. These events have highlighted the need for ethical governance and management, and for the need to look beyond mere systems and procedures. This will ensure compliance with corporate governance codes, in substance and not merely in form.

   Again, one of the goals of good corporate governance is investor protection. The individual investor is at the end of a chain of financial information, stretching from corporate accountants and management, through Boards of Directors and audit committees, to independent auditors and stock market analysts, to the investing public. Many of the links in this chain need to be strengthened or replaced to preserve its integrity.

   SEBI, therefore, believed that a need to review the existing code on corporate governance arose from two perspectives,-

   1. to evaluate the adequacy of the existing practices, and

   2. to further improve the existing practices.

   In the context of the rationale set out above, SEBI believed it necessary to form a committee on corporate governance, comprising representatives from the stock exchanges, chambers of commerce, investor associations and professional bodies. The SEBI Committee on Corporate Governance (the "Committee") was constituted under the Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited.