India as a state, presents a unique case study as to the aspects of corporate governance in its contemporary economic arena. As one of the BRICS bloc of nations including Brazil, Russia, India, China and South Africa, India is an emergent global economy, whose strides have received wide acclamation from all quarters of the global community. Under the leadership of Prime Minister Singh, the state has experienced a remarkable economic growth over the years, which is directly linked to good corporate governance in most of its key economic pillars.
Unfortunately, the above has not been attained without challenges as exemplified by a number of scandals and crises, which have hit Asian economy. Corporate governance entails the utility of both market and regulatory mechanism, in addition to overall role relationships between organization’s board of directors, its stake/shareholders, its management, and overall set goals prerequisite for company governance. Through a system of sound approach in legal framework, firms/organizations are controlled and directed primarily putting focus on both external and internal corporate structures (Denis, 2003, p. 25).
The intended result is to achieve better monitoring ability with respect to directors and/or management actions, thus enabling early mitigation of agency risks that may result from corporate officials’ offenses. These include funds misappropriation, conflict of interest issues, and mismanagement of company resources among others. Internal structures consist of company executives, board of directors and its employees, while external corporate structures are firm’s suppliers, shareholders, trade creditors, customers, debt-holders, and surrounding communities, which are affected by organization’s activities (Aglietta, 2005, p. 234).
Contemporary interest in corporate governance primarily entails measures present. These act as mitigating tools against conflict of interests between different company's stakeholders. Such measures include utility of laws, policies, institutions, customs/organizational culture and processes among others. Important though is the aspect of ‘accountability’ as encompassed by firm’s employees in the contemporary economic arena.
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Corporate governance is guided principally by a number of ideals, including the responsibilities and roles of board of directors and interests of non-shareholders (stakeholders such as employees, creditors, customers, policy makers, local communities, suppliers and investors). It also includes the equitable treatment and rights of firm shareholders, issues pertaining to transparency and disclosure, and ethical and integrity behavior/code of conduct (Clarke, 2004, p. 60).
With excellent corporate governance, benefits are realized through the decrease of occurrences that portend domestic economic crises. Strongly linked to corporate effectiveness and efficiency, corporate governance generates better and more efficient management of the corporation. While economic prospects of developing states may not be directly dictated by sound corporate governance, the latter does play a central role in shaping these prospects. In a developing state, corporate governance becomes more important, since it plays a critical role in attracting external/foreign investment (Bowen, 1994, p. 34).
Through foreign investment, future economic prospects of a state are thus shaped. Investors consider the following two variables as pointers to good investment measures: investment-associated risks and invested capital return rates. Developing nations have over the years became an ‘attractive environment’ for investors unlike developed states. Superior corporate governance reduces chances of risk through its enhancement of accountability, transparency, and enforceability in the economic arena (Williamson, 2002, p. 186).
Historically, India’s rise on the economic arena from a poor annual $30 per-capita income to the present involved a number of measures in addition to sophisticated policy laws as pertaining to ‘settlements, trading and listings’ such as the 1956 Companies Act. Further was its four fully operational stock exchanges present since its independence in 1947 (Goergen, 2012, p. 34). For a few decades, the country embraced socialism as a departure from its colonial master’s (Britain) capitalist ideals. Through 1951 Industries Act all units of industrial economic output were required to get licenses from central government guided by the theory of socialism (Goergen, 2012, p. 128).
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Through India’s public sector domination of the economy, as stipulated in the 1956 Industrial Policy Resolution, the government initiated mega state-owned ventures, which unfortunately instilled a culture of inefficiency, nepotism and corruption. By government intervention in subsequent periods, the private bankruptcy of these industries was converted to high-cost civic debt. Through the absence of a framework on corporate governance, the situation deteriorated considerably (Claessens, 2000, p. 105).
With minimal government accountability and punitive measures, the remaining companies abused the existent laws, in addition to a rife practice of nepotism in the composition of most Board of Directors. Dominating shareholders and crooked management further exacerbated the already dire situation. This dismal performance, in terms of corporate governance, by the Indian economic arena continued up to the early 1990s period signaling an end to India’s pre-Liberalization socialist era (Goergen, 2012, p. 96).
The year 1999 is most important in the history of country’s corporate governance arena. Its Parliament created the SEBI – Securities and Exchange Board of India – that aimed primarily to protect investor interests in addition to promoting both regulation and development of securities market. This shift was as a result of India’s path from socialist ideology towards western ideology, which is based on theories of liberalization and capitalism. Majority of Indian enterprises consequently sought essential capital from the stock market and thus the need for good corporate governance in all aspects pertaining to its economy (Baker, 2009, p. 98).
As an answer to unprincipled corporate governance, India’s first code of corporate governance as unveiled (1998) by the Confederation of Indian Industry (CII), its first business association has been slowly but steady adopted by firms. The acceptance of the Birla Committee recommendations by the SEBI, as pertaining to a code of corporate governance, resulted in introduction of Clause 49 to the Listing Agreement of Stock Exchanges. This clause outlines corporate governance vis-à-vis vital requirements in the case of exchange-traded firms/companies (Pande, 2011, p. 30).
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The year 2003 saw the institution of the Murthy Committee by SEBI to provide a scrutiny of India’s framework (on corporate governance) further in addition to making extra recommendations and improve overall framework effectiveness (Denis, 2003, p. 176). The Murthy Committee recommendations are the latest Clause 49 revisions that were put into law in the year 2006, January 1st. Reform of India’s corporate governance framework principally focuses on the composition and role of firm’s board of directors (Claessens, 2000, p. 365).
Three sets of recommendations including the aforementioned Kumar M. Birla Committee, the Murthy Committee and the CII Code recommendations have all progressed a more sophisticated and nuanced understanding of the issue of corporate governance. Each acts in complementary fashion to the others, and thus ensures the coverage of a wide range of corporate issues. While the CII Code does not mention anything concerning the levels of financial-literacy, as pertaining to directors, the Murthy Committee on the other hand is of the recommendation that firms are to train/ develop their Board members (Sun, 2009, p. 56).
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The training is to be based on the company’s business model, in addition to the company’s business parameters risk profile. Notable also, is the Murthy Committee recommendation, which espouses the necessity of a firm’s Audit Committee being entirely composed of non-executive members who are financially literate and posses skills in accounting or any other related financial knowledge. A criticism to the above, would be India’s reform process, which being based on Anglo-Saxon governance model, is applicable on a limited scale in the state (Bhat, 2007, p. 37).
With focus shifting to good corporate governance, the presence of different governance frameworks aids in better and professionalized management of corporate firms. Such frameworks include the following: -
Audit committees, which perform control procedures internally, through the utility of internal auditors and Board of Directors. Charged with supervision of a firm’s financial reporting and disclosure processes, these audit committees a critical in the positive growth of an entity. In addition, these committees oversee the firm’s compliance with regulation/ set policies; monitor internal control processes; discuss policies on risk management and practices; oversee the hiring, independence and performance of external auditors and examine the available choices of principles and policies of accounting (Bowen W. , 2004, p. 97).
The Satyam Scandal caused shock waves across India’s corporate arena. Primarily focused in the IT sector, the firm Satyam Computer Services Ltd. was India’s fourth largest corporation in the technologies market (Claessens, 2000, p. 284). When its founder and Chairman, Ramalinga Raju, resigned, what he disclosed was shocking. Capital to the tune of US$ 1.5 billion in addition to about 95% of its latest financial statement reports were non-existent. This shows a lapse of firm’s audit committee’s roles as they (9 members) approved a deal that entailed a US$ 1.6 billion buying offer for two companies in the property sector (Baker, 2009, p. 45).
Through this figure, the bid overvalued the intended buyout companies massively and thus would have wiped out the firm’s entire capital. This however was to latter become known as a cover-up of the accounting fraud through its intended assets buying venture. The World Bank, a key client, was consequently required to bar the firm for 8 years from offering computer services. It cited bribery, corruption and data theft as some of the major concerns (Bhat, 2007, p. 87).
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Closely connected to the above failures was firm’s Supervisory Board/Committee as it displayed weaknesses through its non-executive directors being complicit in the fraud. Not eligible to salary payment, these non-executive officials and other officials of the above Committee were tempted to receive bribes for irregular activities such as data manipulation and theft. Corruption was therefore rife within the top management as the scandal was said to have been ongoing for a while (Baker, 2009, p. 103).
Proper internal auditing was and had not for a while, been conducted as such massive disproportionate figures exemplified. The non-existence of over 90% of capital value as indicated in the firm’s latest filed financial statement report further proves to a laxity in proper internal auditing in tandem with very poor or compromised Internal Control frameworks. In terms of statutory auditing, India’s companies (Auditor’s Report) Order (2003), must have internal auditing systems. These depend on their business nature and overall size (Williamson, 1988, p. 570).
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The firm in question lacked the above internal auditing system as is espoused by Mr. Ramalinga Raju confession that he (alone supposedly) ‘cooked up’ numbers in account books to offset his company’s eventual collapse. When it comes to the Whistle blower policy (the Stark Law), it was not a person with insider information who decided to file the charges. Rather it was Mr. Raju who himself later confessed (Williamson, 2002, p. 586).
This was after the failed attempt to buy property assets, when analysts saw the ploy of overvaluing the target business entities. Through customers voicing their concerns about the presence of both accounting irregularities and fraud, the aspect of whistle-blowing was set into motion. As a consequence, the steady resignation of its directors (Board) occurred, which finally culminated in the confession by Mr. Raju. Investor confidence was greatly affected as the company involved had securities in the New York Stock Exchange, operated in over 65 nations, and was ranked number 185 in the yearly Fortune 500 magazine (Masdoor, 2011, p. 485).