Good governance increases shareholder value

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe
0
800

Indian financial markets are among the most heavily regulated markets in the world. However, India cannot claim to have a healthy regulatory compliance record. As financial disclosure norms become more sophisticated and the implementation mechanism is upgraded, companies operating in India that are slow in adapting to these changes will soon have to face regulators in tribunals and courts.

It is time that companies realize the importance of corporate governance and see it as a mechanism to better manage their operations and improve statutory compliance records.

Fair trading

Corporate governance in India is based on the UK’s Cadbury Committee Report, 1992, and the Sarbanes Oxley Act, 2002, of the US. The Securities and Exchange Board of India (SEBI) has been proactive in ensuring that India keeps pace with global corporate governance standards. SEBI is in bilateral talks with the Organization for Economic Co-operation and Development (OECD) to keep Indian norms on par with those in advanced nations.

Shardul Thacker Partner Mulla & Mulla & Craigie Blunt & Caroe
Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

The OECD has set out six principles for an effective corporate governance framework. These are: ensuring the basis for an effective governance framework; the rights of shareholders; equitable treatment of shareholders; the role of stakeholders in such governance; disclosure and transparency; and the responsibility of the board of directors. Pursuant to clause 49 of the listing agreement, SEBI through the stock exchanges ensures that the required compliance and financial disclosure standards are meticulously met by listed entities.

It is observed that quite often corporate officials may not act in the best interests of stakeholders. To curb this, a diligent governance structure should be followed in letter and spirit. Appointment of key managerial personnel should be made after meeting the requisite standards of “fit and proper person guidelines” and they should be made accountable to the stakeholders.

Clause 49 has a statutory force and all listed companies should comply with the regulations in form and substance. In 2010, SEBI’s appellate tribunal passed an order in the case of Kalindee Rail Nirman (Engineering) Ltd v SEBI for breach of clause 49 and imposed a monetary penalty of ₹150,000 (US$2,700) for not complying with the provisions of the listing agreement by not submitting a quarterly compliance report to the stock exchange on time.

Fiduciary duty

The board of a company has a fiduciary responsibility to the stakeholders and is duty bound to protect their interests. Ownership of a company may have a significant bearing in determining the quality of its corporate governance. In India, even when the ownership is closely held between family members, the trend is to ensure that a good governance philosophy is implemented, since it contributes to an increase in shareholder value. This makes the company democratic in nature and hence increases its overall worth.

Diverse ownership is more effective in maintaining corporate governance than if it is concentrated. Clause 49 recommends the creation of a nomination committee which is responsible for identifying and recommending new directors. This acts to curb nomination of friends or relatives onto the board. Independence on the board is imperative.

Section 252 of the Companies Act, 1956, circuitously promotes governance by giving small shareholders the right to appoint at least one director to the board of a public company. The proposed Companies Bill, 2011, provides for granting rights to small shareholders of any listed company to appoint a director of their choice.

In listed public companies there can exist a wide distance between ownership and management. Corporate governance plays a pivotal role in reducing it and governance norms can be either shareholder or stakeholder centric.

A stakeholder-centric model creates the much needed checks and balances for long-term survival and prosperity. It also serves the best interests of investors, employees, customers, lenders, vendors, and the community. Corporate governance maximizes the shareholder value in the company while ensuring fairness to all stakeholders. It is all about transparency and raising the trust and confidence in the way a company runs its business. In other words, it is a relationship of trust – corporate managers operating as trustees on behalf of the stakeholders.

The institution of independent directors and the audit of financials are the foundation pillars of good corporate governance. Efficient governance practices can be adopted by bringing a moral and an ethical change within the corporate officials. It is the responsibility of managers to integrate ethics into their employees’ conduct, and for best international accounting practices to be part of the corporate culture.

Merging ethics with corporate governance will safeguard the interests of investors and subsequently contribute to the company’s growth. It will instil a sense of reliability and contribute towards the economic growth, and thus result in reducing litigation that can erode the net worth of the company.

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

mulla__mulla_new_logo

Mulla House

51, Mahatma Gandhi Road, Flora Fountain

Mumbai 400 001, INDIA

Tel: +91 22 2262 3191 / +91 22 6634 5496

Fax: +91 22 6634 5497

Email: shardul.thacker@mullaandmulla.com