Summary
This article raises a very serious issue of diversion & misuse of public funds and bank funds for personal purposes by several promoters in India. This issue has to been as a sub text in the overall context of poor corporate governance and unethical corporate gate keepers in India.
Analysis
The corporate sector, which accounts for about half of India’s GDP, has a major corporate social responsibility of leading by example in improving the general transperancy, good goverance and corruption free society in our country which is a growing economic power. However, but for a few exceptions, the big boys in the corporate sector have not been seen to be making any conscious effort in this direction. On the other hand, some of the companies by their bad corporate citizenship have indirectly fuelled bad goverance and corruption in our society. The disgraceful Satyam Computers imbroglio is a pointer in this direction. There may be scores of big and not so big Satyams which have not yet been exposed. The principal gate keepers in any corporate are the CEO, CFO, Auditors, Credit Rating agencies, Independent Directors, Institutional Investors, Bankers etc. It is paramount that these gate keepers are insulated from the influence of management of the company to enable them to conduct themselves as true gate keepers. Then only the corporate goveranance architecture in any company will work. SEBI Chairman Mr C.B.Bhave recently, during a panel discussion at Dayton University in US, had suggested that the compensation mechanism for the auditors and credit rating agencies need to be changed in future, to strengthen the corporate governance structure. “As regulators, we tend to rely on auditors and credit rating agencies heavily. But what is worrisome is that the auditors who report about the management to the shareholders of the company actually are paid by the management. Similarly, the firms who are rated by the credit rating agencies, also happen to be their paymasters” said Mr Bhave. In public sector undertakings, the statutory auditors are appointed by an independent authority like Comptroller & Auditor General of India (CAG) and not by the management of the company. For banks the statutory auditors should be appointed by an independent regulator like RBI. For other listed and unlisted private sector companies of public interest, the staturory audirors should be appointed and their remuneration fixed by concerned regulators like SEBI, Deptt of Company Affairs etc. The CEO and CFO are important pillars in the corporate goveranance architecture of any company. For listed companies, under clause 49 of listing agreement with the stock exchanges, the CEO & CFO have to certify the adequacy of internal controls, detection of any fraud in the company etc. In order to ensure that the CEO & CFO of the company do not work under the influence of the management in monitoring and certifying on the corporate governance issues, it is required that the selection, compensation, performance appraisal, job tenure etc of these key officers are independly done by the Audit Committee or Remuneration Committee of the Board rather than the management of the company. Recently in a TV talk show, Mr S. Shroff of law firm Suresh Shroff & Co has told, based on his experience & assessment, that there are only 5 to 6 really good boards among the big corporates in India. This is a sad commentary. For a corporate board to be truly good needs good independent directors alongwith capable executive/ promoter directors. The independent directors need to be capable people with experience in corporate matters who can guard a company against corporate frauds, protect the interest of minority shareholders and be able to scrutinise related party transactions, authenticity of accounts and so on, besides their ability to give advice for the growth & profitability of the company. In large corporates due to handsome sitting fee, commission, ESOP’s etc being paid to the independent directors, their independence is being challenged. In many a small company, the promoters simply rope in their friends, known persons and distant relatives as independent directors. Appropriate checks and balances needs to be instituted in the selection and compensation of independent directors. Also their role and responsibilities need to be more explicitly defined. All the above need necessary legislative changes or regulatory fiats. Only strong legislations (like Sarbanes Oxley Act), pro-active & constant regulatory vigilence and deterrent punishments to the culprits can ensure good corporate governance and not by pep talks alone.
