SITUATING AND ANALYZING CORPORATE GOVERNANCE IN INDIA SEQUEL TO GLOBAL FINANCIAL CRISIS

Abstract

Corporate governance reform and regulation completely entangles with scandals and crises. In the aftermath of failures, rules and regulations are incorporated that soon become the best practices of corporate governance in the international arena. The prolonged systematic crises of global financial markets that commenced in 2008 was unimaginable in terms of its scale and reach. It was also a crisis in corporate governance and regulation with several deficiencies in corporate governance structure and processes lead to collapse of many financial institutions, triggering the crisis. In India, on the heels of this global crisis a massive financial scam also occurred that left one and all wondering what went wrong. In this perspective, this study reassesses the Indian corporate governance system, its regulatory framework and its implementation in the corporations’ sequel to global financial crisis. The study with its desired aim is structured in eight chapters. Chapter One provides the background, defines the central research question and sub-questions and sets the objectives of the study. Further, relevance, scope, research design and approach of the study are presented here. Chapter Two examines the theoretical underpinnings of corporate governance corporate governance to unravel basic underlying concepts, definitions, associated system and its peculiarities, and concerned theories. In the chapter, it is understood that corporate governance concept is intrinsically linked to the corporation, and both have evolved perpetually. The study highlights that while every country has its own system of corporate governance with peculiar traits and features, comparative assessment of corporate governance systems of the world can be made by classifying them into three broad categories: Market Oriented; Network Oriented; and Emerging Market System. The chapter evaluates two theories: agency theory and stakeholder theory exemplify their ideology and justifying their stance. Chapter Three establishes that corporate governance norms, practices, new codes and regulation have evolved as a reactive approach to mismanagement and scandals, and failure of existing regulations to cope with them. Scandals and financial crises have serious repercussions on international corporate governance reform agenda. The corporate governance regulatory framework of different jurisdictions has evolved on a piecemeal basis. In the chapter, comprehensive literature review carried to understand lacunas, issue and factors of corporate governance in the light of global financial crisis reveals several lapses in relation to the board of directors and board practices; executive remuneration and incentive system, and [ii] transparency, disclosure and accountability norms. Comparative corporate governance debate is revisited to analyze the development of new global practices of good governance. Chapter highlights the major focus of corporate governance reforms sequel to recent crisis is in the areas of executive remunerations, board composition and practices, strengthening shareholder rights and risk management. Chapter Four of thesis situates and analyzes corporate governance in India situates and analyzes corporate governance in India with contextual developments, reforms and contemporary state. It highlights that the Indian governance system is derived from the business house model in its historical, cultural, economic and social context and the economic crisis and scandals in the last decade have guided India to adopt legislative Anglo-American based corporate governance regulatory reforms. The chapter examines and analyzes the massive financial scam at Satyam with respect to the board of directors; accounting and auditing; and transparency, disclosure and accountability. The chapter also evaluates various corporate governance factors and issues in India, and highlights that the monitoring mechanism of institutional investors, external auditors, and enforcement through the courts and regulators are weak. Chapter Five identifies and evaluates the determinants of corporate governance framework of a country in relevance to India focusing on both internal and external constituents. To present a comprehensive assessment of the current status of corporate governance in India, important factors that affect corporate governance are identified and a comprehensive a literature review of these factors is done. Essentially, a holistic view is taken to evaluate a corporate governance model for the effective board of directors, outside directors, audit committee, transparency and disclosure, and corporate governance implementation. Chapter Six presents the research approach and methodology of the study. A mixed method approach is undertaken in the study using both quantitative methods and qualitative method in gathering opinions on relevant research issues. A self-explanatory questionnaire was designed for addressing different corporate governance issues in India divided into eight sections. The questionnaire was targeted at three different groups: Regulators, Companies and Others (remaining stakeholders), which form the basis of corporate governance in any country. A total of 128 responses was received in all, of which 22 were from Regulators, 52 from Companies, and 54 from Others. The objective responses were analyzed through cross sectional [iii] perception analysis based on feedback received from each group. Statistical test was also performed to analyze if there exists a significant difference in responses of the groups. The subjective qualitative analysis complemented the findings of the objective analysis through giving greater insight into the issues. Chapter Seven presents results of the study and render a holistic view on corporate governance in the India sequel to global financial crisis. The results point that state of corporate governance in India has improved over a period of time, but still far from being realizable level. Corporate governance in India is still evolving, and it is going through a transitional phase. The results highlight that external oversight mechanism by regulators and courts are more important factors that impede country from having good corporate governance. While corporate governance norms have placed, what that is critically lacking is their enforcement. The result reinforces that unitary board model is abreast for companies, but some scope may be given for the dual board structure in special cases. The result signifies that board structure is critically important. The important findings on board structure include: proving flexibility to companies to their board size, focus on the functional attributes of directors and gender diversity, a majority of independent directors may not necessary for the boards (one–third of independent directors), board composition should not be linked to shareholding pattern, representation of nominee directors from financial stakeholders, separation of Chairman and CEO position may not be possible. Results point that there should be greater focus board processes which governs the outcome of the board as board meetings are not much effective due to lack of serious discussion on the part of directors on important issues. The board of directors perceives to play more of an advisory role to management rather than monitoring role. For improving the board effectiveness, findings signify that the focus should be on disclosure of board activities and placing a legal limit on attendance of board meetings. Results on outside director independence implicates that social relationship of directors is most crucial followed by financial and psychological relationship in maintaining director independence. The appointment process of outside directors, lack of professionalism, required skill and expertise, time commitment are important factors that affect their effectiveness. To improve outside directors effectiveness focus should be there to greater transparency in their appointment process, their professionalism and expertise, restriction of their directorship and greater empowerment. [iv] The results signify that an audit committee should a majority of independent directors with an independent director a Chairman. The accounting based financial knowledge of members is important. The audit committee should more object oriented responsibilities rather compliance with the law and made responsible for maintaining relationship with internal and external auditors of the company and monitoring their work. The results point that the disclosures in the country are at par with the world, particularly financial disclosures. Study signifies that corporate governance disclosures are relatively inconsistent and focused on compliance at minimum level. Findings implicate that those who are responsible for disclosure of information should be strictly and legally held accountable. On corporate governance implementation, the findings of the study highlight regulator view legislative way most appropriate approach. When all the views are taken together, results signify combined approach (having both legislative and voluntary approach) more appropriate way for implementation of corporate governance in India. The findings on other factors for improving corporate governance in India include: establishment of a mandatory nomination committee with a majority of non-executive directors; whistleblowing policy; an ethical code of conduct for directors and executives; half yearly review and approval of risk management plans of the company; abstaining of a concerned related party during voting on the resolution; and approval of remuneration policy of the company by the shareholders. Chapter Eight presents conclusions drawn based on the results of the study. Some important recommendations are made in context of current and proposed corporate governance regulatory framework. The literature review and assessment, conclusions and recommendations made in the study can have policy implications for improving corporate governance in India. The study also implicates even though a significant attempt has made to improve in the new governance framework, it is necessary to have regular assessment for improvement to achieve an attainable effective level. The study lastly specifies its limitation and provides a direction for further research.