Corporate governance: Indian perspective vis-à-vis international perspective.
The word ‘corporate governance’ has become a buzzword these days because of two factors. The first is that
after the collapse of the Soviet Union and the end of the cold war in 1990, it has become the conventional
wisdom all over the world that market dynamics must prevail in economic matters. The concept of
government controlling the commanding heights of the economy has been given up. This, in turn, has made
the market the most decisive factor in settling economic issues.
This has also coincided with the thrust given to globalisation because of the setting up of the WTO and every
member of the WTO trying to bring down the tariff barriers. Globalisation involves the movement of four
economic parameters namely, physical capital in terms of plant and machinery, financial capital in terms of
money invested in capital markets or in FDI, technology, and labour moving across national borders. The
pace of movement of financial capital has become greater because of the pervasive impact of information
technology and the world having become a global village.
When investments take place in emerging markets, the investors want to be sure that not only are the
capital markets or enterprises with which they are investing, run competently but they also have good
corporate governance. Corporate governance represents the value framework, the ethical framework and
the moral framework under which business decisions are taken. In other words, when investments take
place across national borders, the investors want to be sure that not only is their capital handled effectively
and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal
or involving moral hazard.
Corporate governance therefore calls for three factors:
a) Transparency in decision-making
b) Accountability which follows from transparency because responsibilities could be fixed easily for actions
taken or not taken, and
c) The accountability is for the safeguarding the interests of the stakeholders and the investors in the
organization.
Implementation of corporate governance has depended upon laying down explicit codes, which enterprises
and the organisations are supposed to observe. The Cadbury’s code in United Kingdom was the starting
point, which led to a number of other codes. In India itself we have the Kumaramangalam Birla code as a
result of the committee headed by him at the behest of the SEBI. Earlier we had the CII coming up with the
code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes,
however, can only be a guideline. Ultimately effective corporate governance depends upon the commitment
of the people in the organisation. The very first issue of corporate governance in India is, do the India
managements really believe in corporate governance?
Corporate governance depends upon two factors. The first is the commitment of the management for the
principle of integrity and transparency in business operations. The second is the legal and the administrative
framework created by the government. If public governance is weak, we cannot have good corporate
governance. The dramatic Enron case has highlighted how companies, which were the darlings of the stock
market and held up as models for vigorous and innovative growth can ultimately collapse like a house of
cards as they were based on fraud and dishonesty. The association of the accounting firm Anderson has
also raised a doubt about the credibility of even well regarded global players.
In the Indian context, the need for corporate governance has been highlighted because of the scams we
have been having almost as an annual feature ever since we had liberalisation from 1991. We had the
Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. I
have been suggesting that we should learn from especially the United States to see whether we can
replicate similar conditions in our capital market. It is not that the United States is free of scams. Right now
the Enron issue is examined by a number of committees at different levels in the United States. At the end
of all these examinations, they are likely to come with a better
model. In the Indian corporate scene we must be able to induct global standards so that at least while the
scope for scams may still exist, we can reduce the scope to the minimum.
I. BRIEF HISTORY
The “revolution” started in the early 1990s with the Cadbury Report on the financial aspects of corporate
governance, to which was attached a code of best practice. Aimed at listed companies and looking especially
at standards of corporate behaviour and ethics, the “Cadbury Code” was gradually adopted by the City and
the Stock Exchange as a benchmark of good boardroom practice. In 1995, the Greenbury Report added a
set of principles on the remuneration of executive directors (in response to some particular “fat cat”
scandals, notably that involving British Gas chief Cedric Brown, whose 75 per cent rise incensed both unions
and small shareholders), and in 1998 the Hampel Report brought the two together and produced the first
Combined Code. A year later, the Turnbull Report concentrated on risk management and internal controls.
In each case, the reports were prompted either by shareholder disquiet over perceived shortcomings in
corporate structures and their ability to respond to poor performance, or to government threats of
legislation if the corporate sector failed to put its house in order.
In 2002 Derek Higgs, an investment banker was given the brief to look again at corporate governance and
build on the previous reports to produce a single, comprehensive code. Shortly afterwards, the full
consequences of the Enron and WorldCom scandals were realised, leading to new unease. The Higgs Report
came out in early 2003, but was greeted with horror by some leading companies, with claims that it placed
an unrealistic burden on non-executives and marginalised the role of the chairman. The task of taking
Higgs’s draft forward was passed to the Financial Reporting Council (FRC), a body established by
government and comprising members from industry, commerce and the professions. The FRC consulted
further and produced a revised Code that followed most of Higgs’s recommendations but softened a few of
the more contentious points, and so gained general acceptance. With rather less fuss, at the same time Sir
Robert Smith, chairman of the Weir Group, was leading a review of the role of audit committees and his
recommendations were incorporated into the new Code. The 2003 Code was updated with minor
amendments in June 2006, with the new version applying to financial years beginning on or after November
1, 2006.
Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance
by management of the inalienable rights of shareholders as the true owners of the corporation and of their
own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business
conduct and about making a distinction between personal & corporate funds in the management of a
company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of
the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty. On January 1, 2006,
India entered a new era of corporate governance as the reforms popularly known as “Clause 49” took full
effect.1 A decade in the making—and complicated by Enron and the other corporate scandals of this time
period—Clause 49 has brought broad new requirements related to board composition, audit committee
activity, information disclosure, and top management certification. The similarities with Sarbanes Oxley and
other governance reforms around the globe should be obvious.
II. A BRIEF HISTORY OF CORPORATE GOVERNANCE REFORM IN INDIA
Corporate governance and financial regulation in India was generally considered quite poor until the
economic reforms of the early 1990s. The Securities and Exchange Board of India (SEBI) was established in
1992 by an act of Parliament, and SEBI was given the job of regulating stock exchanges, brokers, fraudulent
trade practices, and other areas of corporate activity.5 As its power grew over the decade, SEBI started to
play a much more active role in setting minimum standards for corporate behavior. In addition, a voluntary
code of corporate governance was developed by the Confederation of Indian Industry (CII), a group of well-
regarded Indian firms.
Near the turn of the century, SEBI commissioned a series of projects to improve Indian corporate
governance by building on CII’s code (and by converting the voluntary code into a mandatory one). This
work would eventually lead to the Clause 49 reforms. The first SEBI committee, comprised of 17 prominent
business leaders and chaired by Kumar Mangalam Birla, advocated a variety of new governance
requirements— including a minimum number of independent directors, the creation of audit committees and
shareholders’ grievance committees, and additional management disclosures on firm performance.
These recommendations were soon adopted, but, importantly, they were not imposed on every public
company through legislation (in contrast with Sarbanes Oxley in the United States). Instead, SEBI
implemented the Birla Committee reforms by modifying the listing requirements for firms seeking to go
public on an Indian stock exchange. Thus was born Clause 49, a new collection of corporate governance
obligations that individual firms would agree to when they signed listing contracts with any stock exchange
in the country. As part of a gradual roll-out process, the Birla Committee reforms were not imposed
immediately on all public firms. Instead, they were made mandatory in 2001 for the largest Indian
companies (and for newly listing firms), and then expanded to smaller public companies over the next few
years.
All of this seemed fine until 2002, when fallout from Enron, WorldCom, and other corporate governance
catastrophes caused Indian regulators to wonder whether Clause 49 went far enough. SEBI decided to
sponsor a second corporate governance committee chaired by Narayana Murthy, the renowned leader of
Infosys Technologies. The Murthy Committee went to work and released its additional recommendations in
2003. SEBI quickly adopted these suggestions and issued a revised Clause 49 in 2004.
The Murthy Committee reforms expanded on the Birla Committee’s work in several areas. One main focus
related to the qualifications for independent director status: a number of specific requirements were added
to disqualify material suppliers and customers, recently departed executives, relatives, and other closely-
related parties. A second set of changes affected the audit committee: it was now required to meet more
frequently (four times per year), and members had to satisfy new financial literacy requirements. A third
important change mandated CEO and CFO certification of financial reports and internal controls. And a
number of additional shareholder disclosures, including expanded discussion of financial results, were added
to the Clause 49 requirements. As before, these reforms were phased in gradually; all public firms were not
required to comply with the Murthy Committee rules until January 1, 2006.
The fruits of this labor were generally well-received, and Clause 49 seems to have improved the overall
state of Indian corporate governance. For example, a recent study by Bernard Black and Vikramaditya
Khanna argues that stock prices of imminently affected firms jumped almost four percent when SEBI
announced its decision to pursue the initial Clause 49 reforms. Similarly, the World Bank as part of its 2005
standards and codes initiative benchmarked India’s regulatory framework to the OECD principles of
corporate governance. It announced that India has indeed come a long way over the past decade, reporting
that “a series of legal and regulatory reforms have transformed the Indian corporate governance framework
and improved the level of responsibility/accountability of insiders, fairness in the treatment of minority
shareholders and stakeholders, board practices, and transparency.”
But in this same study, the World Bank also flags four areas of concern. First, many sanctions seem
inadequate, and there is a need for stricter enforcement of governance violations in order to increase
compliance with Clause 49. Second, the division of regulatory responsibility between SEBI, the Department
of Company Affairs (DCA), and the individual stock exchanges needs to be clarified to prevent oversight
from slipping between jurisdictional flagstones. Third, board practices need to be strengthened to avoid
director “rubber stamping,” especially by establishing credible institutions for training board members on
their fiduciary responsibilities.21 And finally, according to the World Bank, institutional investors and large
independent shareholders still need to become “important forces to monitor insiders and play a disciplining
role in the governance of corporations.”
CONCLUSION
The ethical temperature of any business or capital market depends on three factors. The first is the
individual’s sense of values. The second is the social values accepted by the business and industry. Let us
not forget that when Harshad Mehta Scam took place, it was claimed that the manner in which the bank
receipts were being treated was the prevailing norm. Perhaps a similar argument would have been given in
the Ketan Parikh Scam. In other words, practices which were later on found to be highly objectionable
become acceptable because that was the prevailing market practice. Social values will depend upon the
standards set up by professional bodies like the Association of Chartered
Accountants or Cost Accounts of India and so on. The third and perhaps the most decisive factor is the
system. It is here we face the main challenge. Our system encourages lack of corporate governance. Some
of the specific steps that should be taken to improve corporate governance are the following:
a) The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous
managements that we find in our country industries become sick, the industrialist do not become sick. BIFR
has also been called the Bureau of Industrial Funeral Rites! It is high time we scrap the entire system. This
will mean the abolition of SICA and organisations like BIFR there under. Mere tinkering with the system by
making amendments is not going to improve the situation.
b) The entire banking system and the Banking Secrecy Act call for a review. Our banking system is
such that if you borrow one lakh of rupees, you are afraid of the bank but if you borrow ten crores of
rupees, the bank is afraid of you. With the amount of NPA going beyond 58000 crores, it is high time that
we amend the Banking Secrecy Act to reveal those who are willful defaulters. The Narasimham Committee’s
recommendation about putting this condition at the time of issuing new loans can cover only to some extent
the moral hazard. It is high time that practice of disclosing the name of willful defaulters is made more
practical and timely. Publishing the names in the case of suits, which have been filed, is of no value at all
because by that time the matter is all but over.
c) Laws like the Benami Transactions Prohibition Act and the Prevention of Money Laundering Act
should be implemented effectively and vigorously. Agencies like the CVC can be used to ensure that corrupt
practices are effectively punished because it is the atmosphere, which encourages proper corporate
behaviour. In India today we have a system where the level of public governance is very poor. There is no
fear of punishment at all. In such a situation it is only a saint who will be observing strictly the rules of
corporate governance.
corporate social responsibility
Environment
Environmental Management
Consolidated Environmental Management System
Toyota intends to establish a Consolidated Environmental
Management System. Through that, it is promoting
certification under the international standard ISO14001 for all
its subsidiaries.
Corporate Values and Principles
Toyota has established a comprehensive approach to global
environmental issues, resulting in the development of the
"Toyota Earth Charter". It describes Toyota's Basic Policy
and Action Guidelines. The "Third Toyota Environmental
Action Plan", covering the period 2001 through 2005, is
being implemented. Toyota's consolidated subsidiaries in
Europe and world-wide are preparing their own action plans,
with specific goals and initiatives.
Environmental Management Systems
In Europe, all Toyota and Lexus cars sold on the European market
are produced in plants, whether in Japan or Europe, that hold the
ISO14001 certification. The new production plant in France
received ISO14001 certification in March 2002, Turkey plant in
1999 and Uk plants already in 1996.
The Marketing and Engineering subsidiary (TMME), successfully
obtained the ISO14001 certification in October 2001 NMSCs
(National Marketing and Sales Companies) have been requested
to take voluntary actions towards systems implementation,
achieving certification in line with ISO14001 by the end of 2005 at
the latest.
Some countries are already forging ahead, such as Sweden, the
first Toyota NMSC in the world to obtain ISO14001 standard in
1998, and Toyota GB, that has been awarded in 2002 a
certification for three international standards (ISO14001 -
environment, OHSAS18001- health & safety, ISO9001 - quality)
across all five of it's UK sites.
Environment
Green technology
The road to the ultimate eco-car
Toyota is a world leader in the research and development
of new technology for the automotive industry. In its role as
the world's third largest producer of cars and light commercial
vehicles, Toyota believes it has a responsibility to protect the
environment for future generations while ensuring practical
mobility for today's consumers.
Toyota technologies for a clean environment
The launch of the Toyota Eco-Project in 1997 created a multilateral approach to developing
the ultimate eco-car. This approach calls for continuous improvement of existing technologies,
such as petrol and diesel engines, in parallel with new technologies, such as electric and
alternative fuel vehicles.
Together, these paths converge on the engineers' goal - the ultimate Eco-car.
Under the project Toyota has already established several milestones including the launch of
Prius, the world's first mass production hybrid petrol-electric vehicle. The company is a world
leader in the development of fuel cell vehicles - and already has seven FCHV-4 sport utility
vehicles under road test. At the same time, Toyota has not lost sight of its responsibilities in
the 'whole-life' cycle of the car, stepping up its commitment to reduced environmental
damage in vehicle production and greater use of recyclable materials at its end.
Environment > Green Technology
Environment
Special awards
Two Top "Engine of the Year Awards 2000" for Toyota
Both Yaris and Prius win "Hi-tech" engine awards for the 2nd
year running
Yaris engine VVT-i - the winner
In 2000 Toyota's "Hi-tech" hybrid technology Prius, and fuel-efficient Yaris VVT-i engines have
both received "Engine of the Year" awards from an international jury of automotive journalists
- for the second year in a row. 1999 top award went to the Yaris' powerful yet fuel-efficient
VVT-i engine, with the Prius being awarded "Best Eco-friendly" engine - an achievement that
has been repeated in 2000.
The Yaris - which in 1999 won the very top "Engine of the Year" award for its 1.0 litre VVT-i
engine - in 2000 took the Engine of the Year award in the 1.0 to 1.4 litre category, with its
1.3 litre VVT-i engine. Variable Valve Timing-intelligent (VVT-i) technology - around which
this winning engine is based - controls the intake valves, closing them sooner at low engine
speeds to reduce knocking, and leaves them open at high speeds to reduce pumping losses to
the cylinder. Toyota's VVT-i technology can also vary the valve timing along a 60-degree
continuum, providing the optimal amount of air, providing efficient combustion at all engine
speeds.
Toyota is not only a leader in developing fuel-efficient engines. It has also developed a high-
tech hybrid engine system - the Toyota Hybrid System (THS) - which combines petrol and
self-charging electric technology. Toyota has successfully put this system into practice with its
Prius model, launched in Japan in 1998, with the second generation launched in Europe in
Autumn 2000. Prius took the prize in the "Best Eco-friendly" category in 1999 awards, and
the jury awarded Prius top prize in this category again in 2000.
"At Toyota we have focussed our engines on the future. We have developed engines that
reduce harmful emissions into our atmosphere and improve vehicle fuel efficiency, while
making certain to continue to provide our customers with both comfort and driving pleasure".
"We feel that our engine technology is one of our greatest assets. The diversity and quality
they display is a good representation of what our technical, engineering and design staff have
worked hard to achieve. Winning the Engine of the Year award further confirms the industry's
recognition of our efforts, and makes us feel very proud."
"In the end," continued Mr. Nakagawa, "the enthusiasm and satisfaction of our customers are
the real judges of the quality of what we produce".
