Wednesday, April 30, 2008

Corporate Governance & Enforcement

The corporate governance norms prescribed by SEBI were tightened earlier this month (as discussed here), whereby the requirement of independence of directors has been made more stringent. However, it is disheartening to note that while there is a move by the regulator to enhance mandatory norms on corporate governance at a substantive level, there is a lot still left to be desired when it comes to implementation. We often find that the principal defaulters are the public sector undertakings themselves. See this news report in Telecom Tiger (

“The Controller and Auditor General (CAG) of India has hit out strongly against state-run MTNL stating that the PSU is flouting corporate governance norms by not appointing specified number of independent Directors on its board as per Clause 49 of the listing agreement.

According to the CAG report, there is only one independent director on the board of MTNL, which operates telecom services in Delhi and Mumbai, as against the requirement of six independent directors.”
Such stories have been repeated in the Indian corporate sector over the last few years. Although the enforcement of corporate governance norms is crucial to the success of a good governance regime, at present it appears that companies, especially the public sector undertakings, are largely able to escape with impunity in spite of failure to comply with the corporate governance norms. Stricter implementation of corporate governance norms should not only ensure proper appointment of truly independent directors on corporate boards, but also that they discharge their functions effectively and carry out their responsibilities to protect the interests of the public shareholders in a listed company.

While on this topic, it is worth briefly noting some recent developments in Singapore. The Code of Corporate Governance 2005 in Singapore also requires the appointment of independent directors constituting at least one-third of the board. Companies did comply with these requirements of appointment. However, over a period of time, whenever there was a corporate governance failure in a company, it was found that the independent directors simply resigned from their posts, often citing person reasons or other reasons not related to the governance of the company. Hence, regulators have now required companies to explain the reasons for resignation of independent directors, so that shareholders are made aware of the precise background of events that led to independent director resignations.

Most recently, an independent director of China Aviation Oil, Lee Suet Fern, resigned from the board of the company. In her letter of resignation, she said it was becoming increasingly difficult for her to properly discharge her role, as a result of CAO's approach to information flow and the management of decision making, review and oversight. This compelled the company to strengthen its measures to improve corporate governance and also to announce the same to its shareholders. This episode indicates that while resignation by independent directors is not the ideal response to corporate governance problems within companies, they do bring out these concerns into the open and force such companies to act in more transparent manner.

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