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Insights into Editorial: L’affaire NSE: is corporate governance an illusion?

 

Context:

Over the past 10 days, the revelations about the functioning of the National Stock Exchange (NSE) during the tenure of Chitra Ramkrishna as Managing Director and Chief Executive Officer (CEO) have had people shaking their heads in disbelief.

The savvy head of the one of the world’s largest bourses taking guidance on organisational matters from a Himalayan yogi?

 

Where the actual problem lies in Corporate world?

Clearly, there was managerial misconduct at NSE. That is no surprise; managerial misconduct is a global phenomenon.

That is why we need checks on management such as an effective board of directors. The bigger problem is that the board of NSE has been found wanting.

How did all this happen and how could it have gone on for so long? The answers lie in the culture of the corporate world and the board room.

In the corporate world, much is forgiven on grounds of performance. When a performing CEO chooses to unduly favour a particular individual or individuals, boards see that as a forgivable infirmity.

Considerations of equity or fairness do not trouble boards unduly — it is a mercy if breaches of regulation do.

 

Importance of Corporate Governance:

  1. Corporate Governance refers to the way a corporation is governed and managed.
  2. The Organization for Economic Co-operation and Development (OECD) defines corporate governance as ‘procedures and processes according to which an organization is directed and controlled’.
  3. The term is highlighted whenever there are corporate frauds. Corporate Governance and Code of corporate governance calls for ethical and accountable corporate administration.
  4. The best practices of corporate governance are important not only for public or shareholders but also for the very existence of the company itself.
  5. Adopting corporate governance will increase the value, sustainability and long-term profits.
  6. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behaviour and sound corporate governance practices.
  7. Negligence of business ethics in corporate governance is a responsible factor for the failure of corporate.
  8. There have been many instances of failure and scams in the corporate sector in India due to the absence of good corporate governance e.g. Satyam scam.
  9. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.

 

The problem is structural:

  1. The problem is structural and it has to do partly with the way board members are selected and partly with the absence of penalties where directors do not live up to their mandate.
  2. Board members are selected by top management (or, in India, by the promoter who is also top management).
  3. In leading companies and institutions, board memberships are lucrative, prestigious and carry attractive perks.
  4. Board members have every incentive to nod their heads to whatever the management wants done.
  5. As long as the top management selects all board members or can influence their selection, there is little hope of any active challenge to management.
  6. If we are to bring about meaningful change, we need to bring in diversity in the selection of board members.

 

Workable solutions to avoid misconduct:

  1. The top management must be allowed to choose not more than 50% of the independent directors.
  2. The rest must be chosen by various other stakeholders — financial institutions, banks, small shareholders, employees, etc. Then, we will have independent directors who are not beholden to the top management for their jobs.
  3. They will be accountable, not to the top management, but to stakeholders who have appointed them.
  4. Once that happens, the dynamics of the boardroom can be expected to change. Of course, we cannot be certain it will.
  5. At the NSE, there were five PIDs who were required to keep SEBI informed about any untoward happenings. They failed to do so.
  6. All we can say is that where independent directors are chosen by diverse stakeholders, there is at least the theoretical possibility of directors challenging the top management.

 

Suggestions:

  1. Regulators act against directors where there is financial malfeasance. They seldom act where there are breaches of regulation as in the present instance. This must change.
  2. Regulators must penalise errant directors through a whole range of instruments — strictures, financial penalties, removal from boards and a permanent ban from board membership.
  3. Lastly, regulators themselves must be held to account. We need periodic independent audits of all regulators by a panel of eminent persons. The audits must evaluate the regulators’ performance in relation to their objectives.
  4. The internal processes and governance mechanisms of regulators must be subjected to the glare of public scrutiny. It is vital to guard the guardians.

 

Conclusion:

In a growing economy like India corporate governance is critical for attracting investment both from domestic and international sources.

We need significant institutional reform if corporate governance is not to remain an illusion.

The problem is structural. It has to do partly with the way board members are selected and partly with the absence of penalties where directors do not live up to their mandate.

A second thing that needs to happen is holding board members accountable for lapses.