Monday, November 16, 2009

Some Literature on Governance and Social Responsibility

Professor Balasubramanian of IIM Bangalore has posted two interesting papers.

In the first paper, Addressing Some Inherent Challenges to Good Corporate Governance, he examines certain specific issues arising due to the concentrated ownership in Indian listed companies. Specifically, he notes:

While the objectives of good governance, namely creation, protection and equitable distribution of shareholder value, have long been recognized, their full achievement in practice has been dogged by challenges emanating from various sources like dominant shareholders, autocratic executive managements, inefficient independent auditors, inefficient enforcement mechanisms, and so on. Standing out prominently among these challenges is the potential for controlling shareholder dominance often abetted, unwittingly or otherwise, by inefficient board surveillance over the executive.
He then considers two specific issues, both involving corporate decision-making, one at the board level and the other at the shareholder level.

Although Indian listed companies are mandated to have independent directors, Professor Balasubramanian notes that independent directors have not been conferred significant powers. For instance, independent directors are to vote on the board like any other directors, which means that they can be outvoted (unless, of course, independents constitute a majority on the board, which is almost a rarity). Furthermore, quorum requirements do not require the presence of independent directors. The solution he proffers is that independent directors should be given affirmative votes or veto powers on specific matters, particularly those that involved conflict of interest or self-dealing transactions. While this will certainly empower independent directors, it will also impose significant responsibility and accountability that such individuals have to property discharge.

At the shareholder level, he advocates the concept of interested shareholders, whereby those who are interested in a resolution (e.g. controlling shareholders in a self-dealing transaction) ought not to participate in the voting process. Current law does not impose any duties on shareholders to abstain from voting at a general meeting, except in certain limited circumstances imposed by SEBI, as discussed earlier on this blog.

In sum, Professor Balasubramian’s recommendations are in furtherance of the recognition that corporate governance norms in India ought to be tailored to suit the structures and environment that operate in the Indian business context.

The second paper, Governing the Socially Responsible Corporation - A Gandhian Perspective, explores the linkages between corporate governance and Gandhian philosophy. The paper considers Gandhian traits relating to trusteeship, truth, non-violence, and the like, in the corporate context. For example, the element of trusteeship is inherent in directors’ fiduciary duties (e.g., loyalty) towards a company; truth is the basis for corporate disclosures and securities regulation; non-violence carries with it principles of social responsibility whereby the activities of corporations ought not to cause harm to its larger group of stakeholders. The paper also has a useful set of dos and don’ts in corporate governance viewed in this light.

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