Wednesday, February 10, 2010

Enhanced Corporate Governance Practices

Although the Satyam episode invited close scrutiny of the corporate governance norms and practices that were prevalent in India, there is some evidence that it has acted as a wakeup call in enhancing board practices. As Arun Duggal observes in a recent Wall Street Journal column:

The first reaction of corporate boards when Satyam blew in January 2009 was to have an independent verification that the cash, bank deposits and financial investments recorded in the company's books were accurate. The board of directors, particularly independent directors, met with the external and internal auditors to assure themselves that the reported financial statements were true and accurate and that the auditors were independent and diligent. Over 100 independent directors resigned from various boards as they realized that with directorship come certain responsibilities and obligations.

Over the last year, there has been a steady improvement in the functioning of boards. The audit committee function has become more thorough and meetings have become more substantial and longer. Some audit committees meet for half a day or longer rather than a superficial one hour meeting in the past. They also meet with the auditors without management being present. Related party transactions are scrutinized in greater depth and promoters have to disclose if they have pledged their shares to raise financing.
Duggal favours the approach followed by the Indian regulators through adoption of voluntary guidelines for corporate governance rather than acting through a knee-jerk reaction (a reference to Sarbanes-Oxley), although he highlights some shortcomings of the voluntary guidelines and provides suggestions for improvement.

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