By now one can safely argue that there is a complete grammar, a well-defined code, for adopting such committee reports in India. This practice of somehow willingly becoming a carbon copy of others has been our Achilles heel since Independence. This has only been accentuated in the post-liberalisation era.
No wonder, in the past fifteen years, for every report of the government that has gone on to shape and de-shape the economic policy formulations of India one can readily trace its origins to an authentic source abroad. The capital adequacy norms, the competition law and the accounting standards belong to this genre.
The concept of 'corporate governance' is one such idea. Consequently, while we proceeded to 'adopt' the idea we failed to internally debate the various models that would be suitable to the Indian business environment. Neither did we bother to observe the external debate world over on the various models of corporate governance.
Yet, this idea was celebrated as the most original idea in our reforms process by finance professionals, chartered accountants and the company secretaries. In the process we never debated it origins, potency or efficacy in the Indian context. Sadly, the very idea was marketed as 'professional opportunities' by various professional bodies.
It would thus be difficult even to point out three genuine differences between the committee report that went on to prescribe the code for corporate governance in India and the original report on corporate governance in the United States -- the Cadbury Report.
The context to the issue
The latest imbroglio involving one of India's largest IT companies, Satyam Computer Services [Get Quote], has virtually discredited the concept of corporate governance.
Satyam, as it is widely reported sought to invest into another company involving a conflict of interest for its promoters. This in turn involved a change in the fundamental character of the company and utilization of virtually its entire cash balance.
Satyam was also being accused by the World Bank for bribing its employees to get certain contracts awarded in the company's favour.
While these are allegations at this point in time, it may be noted, that the company had approached suitable independent professionals to get the necessary clearances under the extant law of the land as well as appoint independent directors. Ostensibly, the idea is to 'comply' with the code of corporate governance on paper.
What is interesting to note here is that as negative reports about the company come out into the open, let us not forget that it won the prestigious Golden Peacock Global Award for excellence in Corporate Governance.
The company was named the winner by the World Council for Corporate Governance as recently as in September 2008!
That, in effect, is corporate governance in practice for you!
Not the idea but the model is a problem
Naturally, the debate once again arises as to the very idea of corporate governance and the model that is suitable for a country like India. The issue, let me reiterate, is not the idea per se but the model that effectuates the idea.
Pointing out to the fundamental flaw in our understanding of the concept of corporate governance in India by drawing 'heavily on the large Anglo-American literature on the subject,' he argued that the issues involving corporate governance problems in India are different, requiring different solutions.
According to him, the governance issue in the Anglo-Saxon world aims essentially at disciplining the management which has ceased to be effectively accountable to the owners. In contrast, the problem in the Indian corporate sector, he pointed out, is that of disciplining the dominant shareholder and protecting the minority shareholders, as it is vindicated in the recent Satyam case.
To understand the issues that drive the idea of corporate governance in the West, a brief reference to their arrangement is inevitable. Having successfully worked over the decades to separate ownership and management, owners, (especially, institutional owners) realised that they are unable to exercise effective control over the management or the board.
Capturing the entire issue rather succinctly, professor Verma points out, ". . . the management becomes self-perpetuating and the composition of the board itself is largely influenced by the likes and dislikes of the chief executive officer. Corporate governance reforms in the US and the UK have focussed on making the board independent of the CEO."
Virtually concurring with professor Verma on this paradigm, Wikipedia too points out, "Perverse incentives have pervaded many corporate boards in the developed world, with board members beholden to the chief executive whose actions they are intended to oversee." It is this predicament that necessitated the very idea of corporate governance with independent directors in the West.
In contrast, the issues in India are entirely distinct -- primarily due to our overall social-economic conditions. Therefore the issue in Indian corporate governance is not a 'conflict between management and owners' as elsewhere, but 'a conflict between the dominant shareholders and the minority shareholders'.
And Professor Verma rightly concludes, "The board cannot even in theory resolve this conflict" and that "some of the most glaring abuses of corporate governance in India have been defended on the principle of shareholder democracy since they have been sanctioned by resolutions of the general body of shareholders."
Need to re-think
By now it is increasingly obvious that the very concept of corporate governance modelled on the Western system is un-workable in a country like India. Little do we realise that such efforts are akin to taking a hair of an elephant, transplanting it on the head of a bald man and making him look like a bear.
In the West, we are talking of an ownerless, CEO-driven paradigm. In India, it is still family-controlled, owner-driven paradigm. CEOs do not matter much in the management of the company. Yet, we talk of a standard, global prescription to diverse situations.
Needless to emphasise, the solution to these problems in India lies not within the company, but outside. This is precisely what happened in the Satyam case.
The alleged infraction of law arose despite independent directors and was stopped not by such directors but by forces outside the company.
It may be noted that the very idea of independent directors is to ensure commitment to values, ethical business conduct and about making a distinction between personal and corporate funds in the management of a company.
Yet, most independent directors have become sidekicks for the management, eying their commission and fees, forgetting their very purpose of appointment. In the process, they implicitly transform into dependent directors. The billion-rupee question remains: who will monitor these independent directors and penalize them?
One may recall that it was not long ago that one of the Ambani brothers made a 500-page complaint about corporate governance violations in a company in which he himself was a director. Subsequently, nothing was heard about it.
Similarly, it is reliably learnt that even public sector units that failed to appoint independent directors and violated some of the code of corporate governance, were exonerated by the Securities and Exchange Board of India under pressure from the respective ministries.
So much for institutional efficacy, especially when it involves large corporates and PSUs.
Nevertheless, there are enough provisions in the Indian Companies Act to penalise errant directors. The problem is that most of them are in the statute book, rarely used and mostly misused or abused.
The solution, therefore, to ensure proper corporate governance is to make these institutions and laws functional, not to merely adopt solutions of a different country and economy worked out in a different context.
With the very concept of independent directors fast becoming a mockery, we need to think of the alternatives. For starters, we need to strengthen external institutions -- the Registrar of Companies and the Sebi, especially the former -- to deal with such issues.
With a turf war raging between the two on who should administer corporate governance, one wonders who will bell the cat.
The Satyam issue has suddenly brought out the soft underbelly of our corporate governance model, exposing in the process the fragility of adopting imported ideas. Obviously, we need to debate and perhaps comprehensively overhaul the concept of corporate governance. The moot point is whether we mentally prepared at least now?