Workshop Report
Highlighting the importance of corporate governance, Prof. Ajay Garg said that while the precise definition of the term was difficult to determine, the common dimensions of corporate governance included fairness, accountability, transparency, integrity and the ownership structure. The fundamental insight from which the field of corporate governance emanates is that there are potential problems associated with the separation of ownership and control i.e., agency problem that is inherent in the modern corporate form of organisation. The major thrust of corporate governance reforms world wide essentially has been to reestablish the balance between management and the board so that the former runs the company while the latter contributes to its strategic and operational development and provides the oversight needed to satisfy shareholders.
Prof. Garg elaborated both on the role of executive as well as independent directors in the smooth functioning of the organisation. While the executive directors are important as they posses more knowledge about the company and are future CEO’s, they often cause manipulation and hence the need of independent directors arises. He reiterated that the executive directors are responsible for the management of the company and the independent directors are responsible for monitoring them, and this alone would help in reducing the agency cost.
He discussed at length various guidelines and committees concerning corporate governance. The guidelines of corporate governance were as a result of directors not fulfilling their duties. Most of the Indian guidelines on corporate governance have been adopted form the U.K guidelines. The various guidelines on corporate governance in U.K were given by the Cadbury Committee, Greenbury Report, Hampel Report and Higgs Report; and in India by the CII, Birla Committee, Naresh Chander Committee, and the J.J. Irani Committee. All these committees and reports indicate a certain minimum percentage of independent directors should be there on the board.
A plethora of researches indicate that the system of corporate governance in a particular country is context specific. Each country has through time developed a variety of governance mechanisms. With regards to India, there is empirical evidence that independent directors have so far failed to perform their monitoring role effectively. A number of cases related to the corporate governance were then discussed, namely Digital Global Soft, T.V.S. Suzuki, Reliance Industries, Pfizer India Ltd., Sandvik Asia and iGate Corporation. They all highlighted that the role of the board of directors in protecting the shareholders was questionable.
The session was concluded by putting forward certain important questions:
- Would corporate governance models that are good for U.K. also work in Indian context?
- Do we have the requisite competence to formulate guidelines for corporate governance?
- How can we resolve the gap between what directors do and what they are supposed to do?
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