25 May CORPORATE GOVERNANCE-A COMPARATIVE STUDY OF SELECT PUBLIC SECTOR AND PRIVATE SECTOR COMPANIES IN INDIA
CORPORATE GOVERNANCE-A COMPARATIVE STUDY OF SELECT PUBLIC SECTOR AND PRIVATE SECTOR COMPANIES IN INDIA
T. VENKATESWARA RAO., Asst.Professor
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis shareholders’ welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world (see section 9 below).
It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.
OBJECTIVES OF THE STUDY
Counterbalancing the very strong recent public interest in the corporate governance of private sector companies has been a vigorous interest in the governance of public sector organisations. While there are similarities between the two sectors in governance terms, there are also significant differences that shape the way government departments, authorities, corporations and even government business enterprises are organised and governed. If the public sector is looked at even more closely, there is a wide variety of forms, structures, processes and practices that can be discerned from agency to agency.
The present study has multifold objectives :
1. To compare and contrast corporate governance practices of Public sector and private sector companies in India.
2. To examine whether there is any correlation between corporate governance practices and the performance of the company.
3. To Study the investors perception on the company having good governance practices.
4. To understand common governance practices if any , in both public sector and private sector companies.
I. CORPORATE GOVERNANCE IN INDIAN PRIVATE SECTOR COMPANIES
Code of Conduct (hereinafter referred to as “the Code”) has been framed and adopted by Grasim Industries Limited (hereinafter referred to as “the Company”) in compliance with the provisions of Clause 49 of the Listing Agreements entered into by the Company with the Stock Exchanges.
The Code applies to the Members of Board of Directors (hereinafter referred to as “Board Members) and Members of the Senior Management Team of the Company one level below the Executive Directors, viz. Business Heads, Unit Heads, Presidents, Joint Presidents and all other executives having similar or equivalent rank in the Company and the Company Secretary of the Company (hereinafter referred to as “Senior Managers”).
The Company Secretary shall be the Compliance Officer for the purpose of this Code.
The Code shall come into force with effect from 1 January 2006 and future amendments / modifications shall take effect from the date stated therein.
The Code shall be posted on the website of the Company.
Code of conduct
The Board Members and Senior Managers shall observe the highest standards of ethical conduct and integrity and shall work to the best of their ability and judgement.
The Board Members and the Senior Managers of the Company:
Shall maintain and help the Company in maintaining highest degree of Corporate Governance practices.
Shall act in utmost good faith and exercise due care, diligence and integrity in performing their office duties.
Shall ensure that they use the Company’s assets, properties, information and intellectual rights for official purpose only or as per the terms of their appointment.
Shall not seek, accept or receive, directly or indirectly, any gift, payments or favour in whatsoever form from Company’s business associates, which can be perceived as being given to gain favour or dealing with the Company and shall ensure that the Company’s interests are never compromised.
Shall maintain confidentiality of information entrusted by the Company or acquired during performance of their duties and shall not use it for personal gain or advantage.
Shall not commit any offences involving morale turpitude or any act contrary to law or opposed to the public policy.
Shall not communicate with any member of press or publicity media or any other outside agency on matters concerning the Company, except through the designated spokespersons or authorised otherwise.
Shall not, without the prior approval of the Board or Senior Management, as the case may be, accept employment or a position of responsibility with any other organization for remuneration or otherwise that are prejudicial to the interests of the Company and shall not allow personal interest to conflict with the interest of the Company.
Shall in conformity with applicable legal provisions disclose personal and/ or financial interest in any business dealings concerning the Company and shall declare information about their relatives (spouse, dependent children and dependent parents) including transactions, if any, entered into with them.
Shall ensure compliance of the prescribed safety & environment related norms and other applicable codes, laws, rules, regulations and statutes, which if not complied with may, otherwise, disqualify him/ her from his/ her association with the Company.
Shall ensure compliance with SEBI (Prohibition of Insider Trading) Regulations, 1992 as also other regulations as may become applicable to them from time to time.
Annual compliance reporting:
Board Member and Senior Managers shall affirm compliance with this Code on an annual basis as at the end of the each financial year of the Company (as per Appendix I within 7 days of the close of every financial year).
Acknowledgement of receipt of the code
Each Board Members and Senior Managers both present and future shall acknowledge receipt of the Code or any modification(s) thereto, in the acknowledgement form annexed to this Code as Appendix – II and forward the same to the Compliance Officer.
Any breach of the aforesaid Code brought to the notice of the Compliance Officer or any member of the Board or Senior Management shall be reported to the Board of Directors of the Company for necessary action.
ITC’s Corporate Governance initiative is based on two core principles. These are :
i. Management must have the executive freedom to drive the enterprise forward without undue restraints; and
- This freedom of management should be exercised within a framework of effective accountability.
ITC believes that any meaningful policy on Corporate Governance must provide empowerment to the executive management of the Company, and simultaneously create a mechanism of checks and balances which ensures that the decision making powers vested in the executive management is not only not misused, but is used with care and responsibility to meet stakeholder aspirations and societal expectations.
From the above definition and core principles of Corporate Governance emerge the cornerstones of ITC’s governance philosophy, namely trusteeship, transparency, empowerment and accountability, control and ethical corporate citizenship. ITC believes that the practice of each of these leads to the creation of the right corporate culture in which the company is managed in a manner that fulfíls the purpose of Corporate Governance.
ITC believes that large corporations like itself have both a social and economic purpose. They represent a coalition of interests, namely those of the shareholders, other providers of capital, business associates and employees. This belief therefore casts a responsibility of trusteeship on the Company’s Board of Directors. They are to act as trustees to protect and enhance shareholder value, as well as to ensure that the Company fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders, large or small, are protected.
ITC believes that transparency means explaining Company’s policies and actions to those to whom it has responsibilities. Therefore transparency must lead to maximum appropriate disclosures without jeopardising the Company’s strategic interests. Internally, transparency means openness in Company’s relationship with its employees, as well as the conduct of its business in a manner that will bear scrutiny. We believe transparency enhances accountability.
Empowerment and Accountability :
Empowerment is an essential concomitant of ITC’s first core principle of governance that management must have the freedom to drive the enterprise forward. ITC believes that empowerment is a process of actualising the potential of its employees. Empowerment unleashes creativity and innovation throughout the organisation by truly vesting decision-making powers at the most appropriate levels in the organisational hierarchy.
ITC believes that the Board of Directors are accountable to the shareholders, and the management is accountable to the Board of Directors. We believe that empowerment, combined with accountability, provides an impetus to performance and improves effectiveness, thereby enhancing shareholder value.
ITC believes that control is a necessary concomitant of its second core principle of governance that the freedom of management should be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed.
Ethical Corporate Citizenship :
ITC believes that corporations like itself have a responsibility to set exemplary standards of ethical behaviour, both internally within the organisation, as well as in their external relationships. We believe that unethical behaviour corrupts organisational culture and undermines stakeholder value.
Code of Conduct for Directors and Members of Senior Management
This code of conduct shall apply to the directors and members of the senior management of Bajaj Auto Limited (referred to hereinafter as BAL or the Company).
For this code, members of the senior management (hereinafter referred to as `senior managers’) shall mean those personnel of the company, who are members of the core management team, but shall exclude the whole-time directors.
Directors and senior managers shall observe the highest standards of ethical conduct and integrity and shall work to the best of their ability and judgement. Directors and senior managers shall be governed by the rules and regulations of the company as are made applicable to them from time to time.
Directors and senior managers shall affirm compliance with this code on an annual basis as at the end of each financial year.
Code of conduct:
- Directors and senior managers shall ensure that they use the company’s assets, properties and services for official purposes only or as per the terms of appointment.
- Directors and senior managers shall not receive directly or indirectly any benefit from the company’s business associates, which is intended or can be perceived as being given to gain favour for dealing with the company.
- Directors and senior managers shall ensure the security of all confidential information available to them in the course of their duties.
- No director or senior manager, other than the designated spokespersons shall engage with any member of press and media in matters concerning the company. In such cases, they should direct the request to the designated spokespersons.
- Directors and senior managers shall not engage in any material business relationship or activity, which conflicts with their duties towards the company.
- Senior managers shall not, without the prior approval of the managing director of the company, accept employment or a position of responsibility with any organisation for remuneration or otherwise. In case of Whole-time Directors, such prior approval must be obtained from the board of directors of the company.
- Directors and senior managers shall declare information about their relatives (spouse, children and parents) employed in the company.
Senior managers shall follow all prescribed safety and environment-related norms.
As required under revised Clause 49 of the Listing Agreement the following code of conduct has been approved by the Board of Directors and is applicable to the Directors and Senior Management of the Company.
1. Ethical conduct
All directors and senior management employees shall deal on behalf of the Company with professionalism, honesty, integrity as well as high moral and ethical standards. Such conduct shall be fair and transparent and be perceived to be as such by third parties
2. Conflict of interest
business, relationship or activity, which might detrimentally conflict with the interest of the Company
All directors and senior management employees of the Company shall ensure that their actions in the conduct of business are totally transparent except where the needs of business security dictate otherwise. Such transparency shall be brought about through appropriate policies, systems and processes.
4. Legal compliance
All directors and senior management employees of the Company shall at all times ensure compliance with all the relevant laws and regulations affecting operations of the Company. They shall abreast of the affairs of the Company and be kept informed of the Company’s compliance with relevant laws, rules and regulations. In the event that the implication of law is not clear, the course of action chosen must be supported by eminent legal counsel whose opinion should be documented.
5. Rightful use of company’s assets
All the assets of the Company both tangible and intangible shall be employed for the purpose of conducting the business for which they are duly authorized. None of the assets of the Company should be misused or diverted for personal purpose.
6. Cost consciousness
All the directors and senior management employees of the Company should strive for optimum utilization of available resources. They shall exercise care to ensure that costs are reasonable and there is no wastage. It shall be their duty to avoid ostentation in Company expenditure.
7. Confidential information
All directors and senior management employees shall ensure that any confidential information gained in their official capacity is not utilized for personal profit or for the advantage of any other person. They shall not provide any information either formally or informally to the press or to any other publicity media unless specifically authorized to do so. They shall adhere to the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992.
8. Relationships with Suppliers and Customers
The Directors and senior management employees of the Company during the course of interaction with suppliers and customers, shall neither receive nor offer or make, directly and indirectly, any illegal payments, remuneration, gifts, donations or comparable benefits which are intended or perceived to obtain business or uncompetitive favours for the conduct of its business. However this is not intended to include gifts of customary nature
9. Interaction with Media
The Directors and senior management employees other than the designated spokespersons shall not engage with any member of press and media in matters concerning the Company. In such cases, they should direct the request to the designated spokespersons.
10. Safety and Environment
The Directors and senior management employee shall follow all prescribed safety and environment-related norms.
5. HINDUSTAN UNILEVER:
Hindustan Unilever Limited believes that for a Company to be successful, it must maintain global standards of Corporate Conduct towards all its stakeholders. The Company’s foundation has therefore been rooted to stringent Corporate Governance principles. At Hindustan Unilever, we believe that the principles of fairness, transparency and accountability are the cornerstones for good governance. The HUL Code of Business Principles reflects the Company’s commitment to these principles. It is the Company’s endeavour to continue to achieve highest governance levels.
As regards the compliance with the requirements of Clause 49 of the Listing Agreement with the Stock Exchanges, the Company is in full compliance with the norms and disclosures.
BOARD OF DIRECTORS
The Board of Directors of the Company represents an optimum mix of professionalism, knowledge and experience. The total strength of the Board of Directors of the Company is 10 Directors comprising a Non-Executive Chairman, four Executive Directors and five Non-Executive Independent Directors.
COMMITTEES OF THE BOARD
The Audit Committee of the Company is entrusted with the responsibility to supervise the Company’s internal control and financial reporting process. The Audit Committee also looks into controls and security of the Company’s critical IT applications,
Remuneration and Compensation Committee
The Remuneration Committee is vested with all the necessary powers and authority to ensure appropriate disclosure on the remuneration of whole-time Directors and to deal with all the elements of remuneration package of all such Directors within the limits approved by the members of the Company. The Compensation Committee administers the stock option plan of the Company.
Shareholder/Investor Grievances Committee
The Committee specifically looks into redressing of investors’ complaints with respect to transfer of shares, non-receipt of shares, non-receipt of declared dividends and ensure expeditious share transfer process. The Committee also monitors and reviews the performance and service standards of the Registrar and Share Transfer Agents of the Company and provides continuous guidance to improve the service levels for investors..
Other Functional Committees
Apart from the above statutory committees, the Board of Directors have constituted other functional committees such as committee for approving disposal of surplus assets of the Company, committee for allotment of shares under ESOP to raise the level of governance as also to meet the specific business needs.
This Code of Ethics / Conduct intends to ensure adherence to highest business and ethical standards while conducting the business of the Bank and compliance with the legal and regulatory requirements, including compliance of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and regulations framed thereunder by the Securities and Exchange Commission of USA and other statutory and regulatory authorities in India and USA. The Bank values the ethical business standards very highly and intends adherence thereto in every segment of its business.
This Code of Ethics/Conduct is applicable to the following persons.
§ The Board Members
Officials of the Bank one level below the Board
The Board members / Officials shall engage in and promote honest and ethical conduct of business, including the ethical handling of actual and / or apparent conflicts of interest between personal and professional relationships.
Conflict of Interest
The Board members / Officials shall avoid conflict of interest and disclose to the Board any material transaction or relationship that reasonably could be expected to give rise to such a conflict.
Confidentiality of Information
The Board members / Officials shall ensure and take all reasonable measures to protect the confidentiality of non-public information about the Bank, its business, customers and other materially significant information obtained or created in connection with any activities with the Bank and to prevent the unauthorised disclosure of such information unless required by applicable laws or regulations or legal or regulatory process.
Disclosure of Information
The Board members / Officials shall endeavor to produce full, fair, accurate, timely and understandable disclosures in reports and documents that the Bank files with or submits to the Securities and Exchange Commission and other regulators and in other public communications made by the Bank
Compliance with Governmental Laws, Rules and Regulations
The Board members / Officials shall comply with all the applicable governmental laws and the applicable rules and regulations.
Variation of the Code and Waivers
The Code shall be reviewed from time to time for updation thereof. Any variation in the Code or any waivers from the provisions of the Code shall be approved by the Board and shall be disclosed on the Bank’s website.
Contract or Term of Employment
Nothing in this Code or other related communications by itself creates or implies an employment contract or terms of employment.
Violation of the Code
The Board shall have the powers to take necessary action in case of any violation of the code.
II . Corporate Governance in Public sector Companies
Keeping in view the importance and role of independent directors in the good
governance of companies, a review was undertaken in respect of all listed government
companies with the objective of assessing the compliance with the provisions of Clause 49 of
the Listing Agreement relating to independent directors on the Board. This review was
primarily based on the information and documents obtained from the Management of the
companies concerned. The review of composition of the Board as on 30 June 2007 of all the
44 Listed government companies (excluding five deemed government companies covered by
Section 619B of the Companies Act, 1956) revealed the following:
There were no independent directors on the Board of nine listed government
companies given below:.
S. No Name of the company
1 Minerals and Metals Trading Corporation Ltd.
2 State Trading Corporation Ltd.
3 Container Corporation of India Ltd.
4 Hindustan Copper Ltd.
5 National Aluminum Co. Ltd.
6 Balmer Lawrie Co. Ltd.
7 Hindustan Cables Ltd.
8 Madras Fertilizers Ltd.
9 The Fertilizers and Chemicals Travancore Ltd.
In 21 listed government companies, the Board did not have the required number of independent directors.
Thus, out of 44 listed government companies, the Board of 30 companies had not been
constituted as per clause 49 of the Listing Agreement.
Constitution and composition of Audit Committee in listed government
Audit Committee is by far the most important working committee of the Board in the
case of a government company with an extensive role in ensuring proper financial reporting and adequacy of internal controls over such reporting. The role of Audit Committees in government companies is closely aligned to C&AG’s constitutional and statutory role in promoting fairness and transparency in financial reporting. A limited review was accordingly undertaken in respect of listed government companies with the objective of assessing the compliance by these companies with various provisions of clause 49 of the Listing Agreement relating to constitution and composition of the Audit Committee. This review was primarily based on the information and documents obtained from the Management of the companies concerned.
As required by Clause 49 of the Listing agreement, the Audit Committee should have
minimum three directors as member and two thirds of which should be independent directors. As on 30 June 2007, in listed government companies revealed that an Audit Committee existed in all listed government companies. However, the following non-compliances were noticed with respect to composition of Audit Committee:
In the following seven government companies , the Audit Committee did not consist
of required number of independent directors:
1.India Tourism Development Corporation Ltd
.2 National Fertilizers Ltd.
3.Mangalore Refinery and Petrochemicals Ltd.
4.Hindustan Photo Films Mfg. Co. Ltd.
5.Dredging Corporation of India Ltd.
6.Hindustan Fluorocarbons Ltd.
7.Mahanagar Telephone Nigam Ltd.
(b)There was no independent director in the Audit Committee of nine listed government
companies as mentioned in para 3.5.2(i) and also in case of IRCON International Ltd.
(c) Though the Board of Bharat Immunological Biologicals Corporation Ltd. consisted of
required number of independent directors, the Audit Committee did not consist of two thirds
independent directors as there was only one independent director out of three directors.
(d) In case of Neyveli Lignite Corporation Limited, there was only one independent
director, as on 31 March 2007, on the Audit Committee of four members. The compliance
with Clause 49 of the Listing Agreement was made only on 1 June 2007 by induction of three
independent directors on the Audit Committee.
(e) There was no Audit Committee during 2006-07 in case of Hindustan Organics
Chemicals Ltd. However, the Committee was constituted by the Company on 28 May 2007.
Thus, the Audit Committee of 18 Central Government listed company had not been
constituted as per Clause 49 of the Listing Agreement.
Non-official Directors on the Board of unlisted government companies
The DPE’s guideline on composition of Board of Directors of CPSEs issued in
March, 1992 require that at least one-third of the Directors on the Board of a CPSE should
consist of non official directors. A limited review was undertaken by Audit in respect of all
unlisted government companies in operation with the objective of assessing the compliance
by these companies with the DPE’s guideline relating to non-official directors on the Board.
This review was primarily based on the information and documents obtained from the
Management of the companies concerned. The review of composition of the Board of
unlisted companies as on 30 June 2007 revealed the following:
(i) There was no non-official director on the Board of 48 government companies
did not have one-third non-official directors as on 30 June 2007.
Thus, the Board of 64 unlisted government companies had not been constituted as per the
Department of Public Enterprises guideline.
Constitution and Composition of Audit Committee in unlisted government
As required by Section 292A of the Companies Act, 1956, every public limited
company having paid up capital of not less than Rs. five crore shall constitute an Audit
Committee at the Board level consisting of minimum of three directors and two thirds of
which shall be directors other than Managing or whole time Directors. A limited review was
undertaken with respect to constitution and composition of Audit Committee, as on 30 June
2007, in unlisted government companies in operation covered by Section 292A based on the
information and documents obtained from the Management of the companies concerned, and
the following instances of non-compliance were noticed:
(a) No Audit Committee was formed by the following companies:
S. No Name of the company
1 Richardson & Cruddas (1972) Ltd.
2 HMT Machines Tools Ltd.
3 HMT Watches Ltd.
4 Spices Trading Corporation Ltd.
5 Bharat Heavy Plates & Vessels Ltd.
(b) Audit Committee formed by Indian Renewable Energy Development Agency Ltd.
consisted of two directors as against the requirement of minimum three. Further, the
Committee did not consist of two thirds of directors as directors other than Managing or
whole-time directors as there was only one such director.
Constitution of Audit Committee by unlisted government companies not covered
by Section 292A of the Companies Act, 1956
Thirty unlisted government companies had formed Audit
Committees as good governance practice, though these were not required to do so as per
Section 292A of the Companies Act, 1956
The corporate governance practices of both public sector and private sector companies are almost similar. We found that the corporate governance practices exert great influence on the performance of the company. Companies which are having good governance practices will have good image among the investors and public as a whole.
Though a lion’s share of the focus in the Satyam episode was on the role of the independent directors, experts believe the role of auditors is now in spotlight.
Experts believe that it is the institutional investors who have the tools, bandwidth and clout to extract information and play an activist role (as had happened in Satyam’s case) in ensuring that managements don’t go off-track. If institutional investors act collectively, they can demand the required changes at companies they have invested in. While the corporate governance framework in the country is seen at par with other developed markets, the same has to be implemented in ‘letter as well as spirit’.
Additionally, shareholders should ensure that the composition of Board of Directors is a balanced mix of independent directors and management appointees. This would help keep a check on the internal processes of the company. With shareholder activism on the rise, the proactive role of institutional investors will also make the company management more accountable. While things have improved substantially over the last five years, experts believe that more needs to be done, which will further improve disclosure levels and make managements accountable.
At the retail shareholder level, one could look at a company’s past track record (including significant events that reflect management excesses), qualitative and quantitative disclosures (vis-a-vis peers) and consistency in delivering on promises. Experts believe that more rigorous vetting is needed when small and medium companies are considered for investment.
Good public sector governance relies on keeping pace with best practice in private sector corporate governance. That is, of harnessing the potential that corporate governance principles and practices can offer. Importantly, however, it also requires an understanding of the tensions and gaps that arise in the transposition of corporate governance from the private to public sector, so that public sector corporate governance can be modified accordingly.