ms-91 mba assignment july dec 2010 Question 2

2. ‘Good Corporate Governance as a system of governance is essential from legal, social, ethical and economic points of view.’ Discuss this statement with the help of an example.

The Need of Corporate Governance

Recent corporate failures and scandals involving mis-governance and unethical behaviour on the part of corporates rocked the corporate sector all over the world, shook the investor confidence in stock markets, and caused regulators and others to question the assumption that most companies do the right thing most of the time. These incidences diminished reputation and goodwill of even those corporate who enjoy the trust and confidence of public at large. These factors highlight the importance of good corporate governance. On the other hand, corporate governance is important because corporate decisions impinge on its shareholders, customer, creditors, the state and employees. Globally the objective of corporate governance is to maximize long-term shareholder value. With the assumption that capital and financial markets are working properly, anything that maximizes shareholder value will necessarily maximize corporate prosperity.

For sound governance, managers need to act as trustee of shareholders, prevent asymmetry of benefits between sections of shareholders, especially between owner-managers and the rest of shareholders. They also need to be a part of societal concerns about labour and environment. In fact stock market analysts see these days a greater correlation between governance and returns. Investment analysts recommend a company based on strength or weakness of a company’s governance infrastructure. Confidence of investors, both domestic and foreign, is the need of the hour. This is to attract ‘patient’ long –term capital that will reduce their cost of capital. Thus, there is a need for intellectual honesty, integrity and transparency, which form the basis for good corporate governance.

Corporate governance in Indian Context

As it was briefly stated earlier, corporate governance has been much talked about in India particularly after 1993. Liberalization brought mixed results for Indian economy. Noticeably, it brought in its wake a spate of corporate scandals. Later on scores of companies made public issues with large premium and then disappeared; prospectus misled the public. The management of most of these companies diverted funds and investors had no option but to repent their lost money. Primary market literally collapsed in the after math of these failures. Slowly, many a family owned businesses moved to become widely held limited companies. The question, how to function in a corporate setup overriding family interest and obligations called for a code of governance. Similarly, corporate banks also came under strain due to scams; governance failure was total. The story of UTI is also well known where millions of small investors lost their capital due to inadequate management practices and weak supervision.

Auditors were following questionable accounting practices on behest of the management and often advising on how doubtful accounting choices might be made so as to remain on the right side of law and at the same time, escape detection by users of financial information. All these factors put strong pressure on many corporates to evolve a good governance practice.

Over the period of time in India companies like Tata Group, Infosys, Wipro have evolved sound principles of governance, intertwining corporate governance with social responsibility. These companies have become global and it is common to find global norms of accounting and disclosure being followed in these corporate houses. Rights of employees, stock options, independent directors, meeting quality norms, price warranty and guarantee- all these have made room for quality governance. Managers have indeed become trustees of shareholders.

It began in 1998 with the Desirable Code of Governance- a voluntary code published by CII, and the first formal regulatory framework for listed companies, established by the SEBI in February 2000, following the guidelines enunciated by the Kumar Mangalam Birla Committee Report. On 21^st August, 2002, the Department of Company Affairs under the Ministry of Finance appointed Naresh Chandra Committee to examine issues pertinent to governance. The committee looked into financial and non-financial disclosure and independent auditing and board oversight of management.

Apart from financial compliance or disclosure, the independent oversight of management is also important. Many companies have disappeared, vanished either due to fraud or poor quality of board resulting in lack of independent oversight. The Kumar Mangalam Birla Committee focused on the role of independent and statutory auditors and also the role of the board of directors.

SEBI constituted a committee on corporate governance under the chairmanship of Sri N. R. Narayana Murthy. The committee included representatives from the stock exchange, chamber of commerce and industry, investor associations and professional bodies, which debated on key issues related to corporate governance. Findings and recommendations of these committees are discussed in the later chapter.

Thus, we find that the corporate India is going through a great churning phase. New aggressive companies are doing business with global ambitions, placing a lot of emphasis on governance and transparency. FIIs are very serious about good governance and disclosures. Liberalization brought great challenges, after initial jolts and pain of restructuring, companies are seeing profits more than before.

Good corporate governance is good business because it inspires investors confidence, which is very essential to attract capital. A few unscrupulous businessmen can, largely undo all the confidence built through the good work by the good companies over time. They need to be handled with iron hands.

However, corporate governance goes beyond the realm of law. It comes from the culture, mindset of management and cannot be regulated by legislation. The watchwords are openness, integrity and accountability.

Companies need not be myopic with short-term goals, caring only about quarterly results or immediate stock prices in the bourses, or that cherished P/E ratio. Good governance maximizes long-term shareholder value, which in turn takes care of short-term goals too.

EXAMPLE

The U.P. KrishiBank was established as a Nationalised Commercial Bank in 1972 an took over the assets and liabilities of the Habib Bank Ltd and Commerce Bank Ltd working in the former East Pakistan. The bank faces the challenges of maintaining a safe andefficient organisation within a country in transition to a market economy.U.P. KrishiBank indicates early in its report (p.3) that it operates ‘ethically and fairly within the governance framework provided by the regulators’, and that it believes ‘in integrity transparency and accountability.’ U.P. KrishiBank includes a separate section in its 2006

Annual Report entitled ‘Corporate Leadership and Social Responsibility’

Disclosures included in this section and other disclosures in the nature of social responsibility reporting are summarized as follows.

1. ‘Corporate Leadership and Social Responsibility’‘In line with the directives and guidelines of the Government and the U.P.  Bank, our corporate leaders of tomorrow need to initiate and maintain a strong and effective corporate structure.

We are very sensitive to the society that we operate within. We have a deep commitment, loyalty and a high sense of responsibility to our nation and its people. Our ethics are clear: not to earn excessive profits, but to operate in a rational and sensitive way. We conform to all of the stringent regulations issued by the Government and the U.P.  Bank. As part or our corporate social responsibility, we contribute greatly to the nourishment of the country’s arts, crafts, culture and sports. We share all sorts of values and sentiments, irrespective of caste, creed or colour. Moreover, we uphold the concept of avoiding gender bias. We have established for women a fair and just share in matters of delegated power, promotion and placement, commensurate with their male counterparts.

As part of its strong commitment to upholding corporate social responsibility, the Bank distributed, like before, U.P. KrishiBank Shishu Sahittaya Award among the budding child competitors. In 2006, the Bank had set up a 500-bed cancer hospital in the capital. The Ahsania Mission will get from the Bank another Tk. 4.00

million in the next two years.’

Given these important statements we continued our content analysis searching for corroborating disclosures. We found a number, which are summarised as follows.

2. The U.P. Krishi Bank reports (p.14) that it assisted in bringing a wide spectrum of people into the mainstream banking economy. Its customers are engaged in ‘trade, commerce, industry and technology and include major business leaders, small and medium traders, marginal farmers, destitute women and unemployed youths.’ The Bank reports that even hill-tribes and ethnic minorities have access to its institutional loan

facilities.

3. Under a section entitled ‘Employee relations’ (p.19) the U.P. Krishi Bank reveals that it has been providing financial assistance to distressed employees. ‘During 2006, a sum of Tk. 3.22 million was given to employees concerned and their spouses for medical treatment… A total number of 356 children of the employees were granted scholarship of Tk. 1.63 million in recognition of their outstanding results in S.S.C. and H.S.C. examinations. The Bank also discloses various contributions it has made to sporting

organisations.

4. The Bank has been active in supporting the Small/Medium Enterprise sector of the economy for many years and provides disclosures about its individual and collaborative efforts in this area.

‘Beyond conventional banking, U.P. Krishi Bank, since 1977, has also been participating in several SME programmes through its own efforts and in collaboration with different national and international agencies like BMET, BRDB, BSCIC, NGOs (BRAC, ASA, Grameen Uddag), IFAD, USAID, ADB, NORAD, SIDA etc. These are aimed at reinforcing efforts of the Government to meet strategic objectives of alleviating poverty of the rural poor, supporting small and micro enterprises/entrepreneurs, increasing output, easing unemployment problem and strengthening the rural financial market. So far, the beneficiaries under the 14 programmes implemented by the SME & Micro Credit Division include 506247 persons of different sectors.’ (p.24)

5. The U.P. KrishiBank is also active in supporting U.P. ’s Agricultural sector and reports its activities in the 2006 annual report. ‘The Bank kept financing one of the country’s priority sectors – agriculture. Since 1977, it started accommodating millions of the rural poor with the mainstream development activities in areas of livestock, fishery, poultry, nursery as well as many off-farm projects and their likes in line with the government policies. Poverty alleviation through income generating activities is one of the strategic priorities that the Bank has kept pursuing to make the institutional help available

to marginal farmers, small entrepreneurs, distressed and destitute women as well as unemployed youths.

‘So far a number of targeted programmes with loan limits from Tk. 5000 to Tk. 50000 have been continued. In 2006, the Bank implemented 54 programmes among 3097759 borrowers, totalling Tk. 25.21 billion.’

6. Finally, we reviewed the composition of the Board of Directors and noted that of a board comprising eight members, none were women. In the case of U.P. KrishiBank the corporate social responsibility disclosures were clustered around the issues of community involvement and responsiveness; economic support for