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THINGS appear to be moving fast on the corporate governance front in India.

It is heartening to note the urgency and seriousness with which reforms are taking place. More important, the initiatives are from the corporate sector itself, and not being forced by the Centre. The Kumar Mangalam Birla Committee recommendations have been accepted by SEBI, and are in their last phase of implementation. The Naresh Chandra committee formed by the Finance Ministry has given its recommendations, and the same are under implementation; the Narayana Murthy Committee report shows that significant progress has been made by the corporate sector after the introduction of Clause-49. The report is in public domain for comments and suggestions. The Companies (Amendment) Bill 2003 has been tabled in Parliament to improve corporate governance for non-listed companies too. Moreover, there is a general awareness on the need to clean up the corporate sector through regulatory reforms. While the reforms appear to be moving in the right direction as far as the legislative structure is concerned, this alone will not raise the corporate governance standards in the country. Legislation can only bring about structural reforms, that of process need the corporate sector's active participation complemented by training and the market's involvement. This will help corporate India understand the benefits of being proactive in good governance. Interventions are required on three fronts: The reforms relating to corporate boards with emphasis on training interventions; increased role for shareholders, particularly the institutional ones; and promoting comprehensive rating system to bring market forces into action.
Strengthening corporate boards

Recently boards have received flak for the collapses of some highly reputed corporations worldwide. This brings to the fore the important question of their effectiveness. In the current business environment where intangibles rule the roost, it is important for corporations to ensure that their reputation is not affected. It is, thus, not surprising that all the committees set up in India for reforming and improving corporate governance practices have given a lot of weightage to improving the boards. Including independent directors, separating the role of th CEO and board chair, setting up of board sub-committees, and regulations on board size and meeting frequency are some interventions for promoting board effectiveness. Independence is often considered to be the panacea for board problems. While the Kumar Manglam Birla Committee recommended that at least one-third of the directors be independent, the Naresh Chandra Committee raised the level to 50 per cent, and also made the definition of independence stricter. The Narayana Murthy Committee further upheld that board independence is crucial for its effectiveness. While independence is necessary, it too is not enough. The directors should have a strong business sense, as well as the capability and the willingness to contribute to strategic decision-making. Considering the paltry compensation or the sitting fees that independent directors receive in most companies, will it be possible to attract such directors? Even if such directors are found will they be motivated enough to discharge their fiduciary duties? This highlights the importance of training newly inducted independent directors as well as the senior ones to understand the philosophy behind their responsibilities.

This is a mammoth task, as pointed out by the Naresh Chandra Committee report which estimates that restructuring the corporate boards of even the listed Group A, B1 and B2 companies will require more that 15,000 new independent directors. It is not surprising that to address the issue of quality contribution from the independent directors, the Companies Bill has also made it compulsory for them to undergo training from a government approved institute within 18 months of appointment.
Promoting shareholder activism

Institutional shareholders control a large percentage of equity in listed Indian firms and are also significant lenders. The Kumar Mangalam Birla Committee recognised the role of financial institutions (FIs) in Indian corporate governance, but recommended against including nominees of these institutions on corporate boards a suggestion endorses also by the Nararayana Murthy Committee. The institutional shareholding in the top 500 companies by market capitalisation was in excess of 16 per cent in 2002. This shareholding represents the percentage of equity shares held by development financial institutions, State financial institutions, insurance companies and mutual funds. In the US, institutional investors control 46.7 per cent of corporate equity and of this 20 per cent is controlled by pension funds, such as CalPers and PSERS. These institutions were responsible for promoting shareholder activism there. While research in the US shows a higher institutional shareholding contributing positively towards shareholder value through better control on a firms' management, evidence from a study done by the author on the Indian corporate sector shows a reverse trend. This, in itself, is an indication that the FIs in India are not taking an active part in improving corporate governance standards. It is well accepted that market is the biggest force promoting corporate governance. Small shareholders can move away from the company that is not doing well, but for large investors it is not that easy. The FIs being block holders, thus, have more incentive to ensure that a company resorts to value maximising strategies. Unfortunately, they do not appear to be doing this. As most Indian boards are dominated by business families, the FIs need to play an activist role in demanding greater transparency and accountability in their decisions. In addition to playing a more active role in boardroom deliberations, the FIs can also promote corporate governance by exerting influence on the Government and regulatory bodies.
Promoting corporate governance ratings

The fact that corporate governance cannot be improved solely by legislation brings to focus the important role of ratings. The phenomenon of corporate governance ratings is still in its infancy in India. The two major credit rating agencies have already come up with their corporate governance rating products, but the companies opting for these are few. CRISIL has come up with Governance and Value Creation Ratings (GVC) largely based on the S&P CG ratings while ICRA has introduced its instrument Corporate Governance Rating (CGR) based on Moody's. Another agency, Fitch India, is in the process of coming up with a rating. Recently CRISIL gave the highest ratings (GVC-1) to HDFC, HDFC Bank and Hero Honda and second level to Dabur, while ICRA gave a second level (CGR-2) to ITC and Godrej. Corporate governance ratings have the ability to achieve what regulations and codes cannot. They enable investors to evaluate companies better. However, these ratings will serve their real purpose only if complemented by institutional investor activism. The pressure from institutional investors will force companies to get themselves rated.

However, investors should take the ratings cautiously and not depend solely on these ratings to make investment decisions. It is a fact that rating agencies in the West were not able to predict the impending collapse of corporates, such as Enron, WorldCom and American Airlines, and had given good ratings to their corporations. Indian rating agencies should learn from their counterparts in the west, and continuously review and upgrade the criteria on which the ratings are based. Moreover, it is necessary that the rating agencies should take into account the adherence to the principles behind indulging in good corporate governance, and do internal research rather than basing the ratings on published information.

On aspects such as executive/senior level hires, executive compensation, performance management systems and projects, PSU management and boards should have complete autonomy. Barring policy matters and matters of national interest and the government should minimise its involvement Maharatna, Navratna and Miniratna PSUs that are listed should lead the way in implementing the Ministry of Corporate Affairs (MCA) voluntary guidelines on corporate governance. PSUs should be leading the way rather than follow the private sector ?To help foster that PSU boards are focused on the leading substantive issues, alternative mechanisms such as a two-tier board structure and introducing board performance assessments should be actively To maximise their input, on executive directors on PSUs should be drawn from the private sector and adequately compensated on par with their private sector counterparts. Sitting executive directors in well run PSUs should be encouraged to assume non-executive director roles in state PSUs and the smaller/unlisted/not so profitable PSUs ?PSU CMDs should be actively consulted and engaged in the selection and appointment of nonexecutive directors on PSU boards which does not happen consistently enough. The role of the Public Enterprises Selection Board (PESB) warrants reconsideration in this context ?The government should deal firmly with non-compliance of corporate governance norms by both listed and unlisted PSUs. Unambiguous disclosures of the compliance levels achieved and clear accountability for compliance are important prerequisites to achieve this ? The government should clearly and unambiguously set out its ownership policy and how it may apply in matters that have ramifications for minority shareholder

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