Saturday, March 7, 2009

The Continuing Debate on Governance in Government Companies

When Government companies list their shares on stock exchanges, they are required to deal with two distinct constituencies from a corporate governance standpoint: one, being the Government itself as the controlling shareholder or promoter, and the other, being the minority (public) shareholders. When the Government is in a controlling position in the company, the obvious question that arises is whether it is required to act solely with a view to profit maximisation, which will in turn benefit the minority shareholders, or whether it is required to act with a larger public purpose in mind. This conflict is not new, as we have seen, and corporate governance advocates will argue that the interest of shareholders is paramount when Government decides to carry on economic activity by inviting private capital (through listing of securities on stock exchanges). Further, this debate is not confined to India alone, as countries like China that have several public sector listed companies are confronted with these issues all the time.

This debate has resurfaced this week with Goldman Sachs issuing a report that raises questions about corporate governance in ONGC, one of India’s premier public sector companies that also carries public shareholding. The principal issue raised in Goldman Sachs’ report relates to the strategy of ONGC in “subsidising loss making stated-owned down stream companies” that it argues has caused loss to the minority shareholders of ONGC. This claim has been strongly contested by ONGC. Although the specifics of the report and its findings are a subject matter of debate, it would be necessary at a general level to consider a couple of issues this episode gives rise to in Indian corporate governance:
1. A substantial number of Indian companies continue to be owned by a controlling shareholder (or ‘promoter’, as the regulatory framework refers to them). This is bound to give rise to conflicts or agency problems between the controlling shareholders and the minority shareholders. As I have argued elsewhere, the broad features of Indian corporate governance norms (such as independent directors, audit committees, CEO/CFO certification, etc.) have been adopted from the U.S. and U.K. where the shareholding is largely diffused, and hence those norms may not be entirely suitable to deal with problems that are peculiar to the corporate structures in India.

2. This problem is exacerbated in the case of Government companies, as these companies are subject to close supervision by the Government. Owing to this, even some of the more reputable Government companies are yet to comply with key provisions of the corporate governance norms, and such non-compliance has even been excused by SEBI (see here and here). Such episodes may likely have deleterious consequences on corporate governance reforms in India. Compliance or otherwise of corporate governance norms by government companies has an important signaling effect. Strict adherence to these norms by government companies may persuade others to follow as well. But, when government companies violate the norms with impunity, it is bound to trigger negative consequences in the market-place thereby making implementation of corporate governance norms a more arduous task.

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