Wednesday, May 12, 2010

Nasscom on Corporate Governance

In early 2009, immediately following the accounting fraud at Satyam, several committees and task forces were constituted to review corporate governance norms and practices in India. Some of them issued their recommendations late last year. These include a report by a task force constituted by the Confederation of Indian Industry (CII) and another by the Institute of Company Secretaries of India. Based on these reports / recommendations, the Ministry of Corporate Affairs, Government of India issued the Corporate Governance Voluntary Guidelines 2009 in December 2009.

During late April this year, another committee that was constituted by Nasscom (“the premier trade body and the chamber of commerce of the IT-BPO industries in India”) headed by Mr. N. R. Narayana Murthy issued its recommendations for further strengthening corporate governance practices in India. The report itself is available here (although it can be downloaded only by members), and the press release and news reports discussing the recommendations are available here, here and here.

At the outset, the appointment of a committee by the IT industry body is understandable because the fraud and governance failures at Satyam put the credibility of the IT/BPO industry in India at stake. Hence, the recommendations too are primarily focused at that industry, although it is intended to be applicable to other industries as well.

The recommendations of the committee regarding board structure, independence of directors, audit committee and disclosures to shareholders substantially overlap with the ground that has already been covered by the previous task forces and committees. However, a distinctive feature of the Nasscom recommendations are that they adopt a more holistic approach and focus heavily on the protection of stakeholders in a company such as customers, employees, other partners such as vendors, and even competitors. To that extent, they represent a marked departure from previous governance reform measures that focus almost solely on protection of shareholder interests. Nasscom seems to prefer a stakeholder approach to corporate governance rather than a pure shareholder approach. All of this is again consistent with lessons from the Satyam episode where it was not only the shareholders, but other constituencies such as employees and customers (and possibly the standing of the entire IT/BPO industry in India) that were left vulnerable to management actions, until the company itself was rescued and subsequently sold to another industry player.

Similar to the guidelines issued by the Ministry of Corporate Affairs in December 2009, the Nasscom recommendations are only voluntary in nature (to be adopted by companies by way of good practice). Furthermore, even unlisted companies as well as private companies are urged upon to comply with these recommendations, and not just listed companies.


Mandar said...

Ambitious idea this, the stakeholder approach to corporate governance; I think Nasscom is getting ahead of itself here.

Its Utopian to think that corporate governance ought to be inclusive rather than exclusive;but dig deeper and the idea that the directors ought to be fiduciaries of more constituencies than one, whose interests often conflict, is not entirely sound.

In addition, for stakeholders other than shareholders, there are other protections available. Customers are (relatively) protected for example by competition in the product markets, employees are (relatively) protected by collective bargaining and competition in the product markets again. Bondholders and creditors can protect themselves by appropriately securing the lent money.

It is the equity-owner who takes the most risk, incurs the sunk costs of investment and who suffers informational asymmetry in investing,who ought to be the (exclusive) focus of corporate governance.

The Nasscom lesson from Satyam fiasco (stakeholders ought to be protected)will lead us down the slippery slope of paternalism.

V. Umakanth said...

Thanks Mandar, for your observations. In the last few years, there was also considerable pressure in the U.K. to enact a stakeholder approach to corporate governance and directors' duties as part of the Companies Act, 2006. However, due to resistance on counts somewhat similar to your comments, the Act adopted a half-way house approach in the form of the "enlightened shareholder value" (ESV) approach, which takes the position that the ultimate objective of company law to generate maximum shareholder value is also the best means of securing protection of all interests and thereby overall prosperity and welfare. This is reflected in section 172(1) of the U.K. Companies Act, 2006.