Capital Market Regulation and Corporate Governance
-Mr. Anurag Goel
Secretary, Ministry of Corporate Affairs,
Government of India & Chairman, Board of Trustees, NFCG
I am very fortunate that while discussing an important subject such as the linkage between capital market regulation and corporate governance, I have two masters with whom I am sharing the dais. One is the master of capital market regulation, Mr Damodaran and the other is, of course, the master of corporate governance in its wider sense Dr Irani. I have shared several boards including SEBI with Mr Damodaran for more than 4 years a part from sharing a friendship that goes back to 30 years. With Dr Irani I have a very different relationship. I am trying to implement a task that he set up for the ministry. I thought I would meet Dr Irani after completing the task and that is why I met him today for the first time. I am in a happy position to tell you that, notwithstanding for over 16 months taken for the drafting, vetting of the new Company Law, all that fortunately is almost done, and by next week we will be through. On the monsoon session the new bill will be introduced in the Parliament and many of the issues, which have been raised today, including some Mr. Damodaran specifically directed at the ministry, will be answered there. The bill was a wide canvass on many of the issues on which we share common concern.
I must tell you that I always enjoyed being the last speaker. The reason is that by the time your turn comes to speak everything that is to be said has already been said. Nobody is expecting anything new especially when you have the panel like the one you have here. This gives me tremendous freedom. I can choose to say and pick up any thoughts that I want to and I thought I will just pick upon two thoughts in today's context- (1) New dimensions are being added to corporate governance. (2) We all seem to know what needs to be done, and how to go about doing it. Mr. Damodaran has already shown a way forward. But before I add to that, I must recall that Dr Irani's task is something which I had not foreseen and he spoke about the new role of the ministry and the vision of the ministry and this is a subject which is very close to my heart. I must take this opportunity to share with you what in my perception this ministry is trying to do. I think and I am saying it because of the genuine feeling, in the last few years ever since it became a ministry in its own right, what we have been able to do and are attempting to do, has perhaps not been done in the last two decades. We have also crystallized for ourselves a clear statement of our vision as to what it is that we want to do. I will give you the vision: "To be a leader and a partner in initiatives for corporate reforms, good corporate governance and enlightened regulation with a view to promote and facilitate effective corporate functioning and investor protection". This ministry today believes that the two basic outcomes that we are looking for, working for all the time is effective corporate functioning on the one hand and investor protection on the other hand and the two obviously work together.
MCA 21, I am told that in international fora and all over people say it is amazing, how could you do it. A minister in the UK told my minister, we have been at it for 6 years and we have got 40% e-filings, how you got it to 100%? A survey by CNBC of CEOs and CFOs said that 92% of them found it to be a revolutionary e-governance initiative and it should be more like that. MCA 21 is something which all of you are aware of.
The Bill for Limited Liability Partnership has gone the rounds of Parliamentary committee and all that over the last one and half years. We moved notice for introduction in the Rajya Sabha in the first week of May, which unfortunately was adjourned sine die. We are sure that it will come in the monsoon session.
Accounting standards were notified in December 2006 and after the crisis that we have been having the last two months, people have started to understand much more the importance of the accounting standards. We are now working towards convergence with international accounting standards and I already had meetings with David, Chairman of the International Accounting Standards Board and people from European Commission and others. We have amended the Acts of the three professional bodies ICAI, ICSI and the Cost and Works Institute. You are aware of the Investor Education and Protection Fund. Some effort has been made but this is an area we need to continue to do more and more work. Then there is the National Foundation for Corporate Governance (NFCG), which has organized this event, and Indian Institute of Corporate Affairs about which I will come a little later. But the purpose of all this is the ministry is working on a wide spectrum starting from legislative and policy framework to delivery system. I would like to tell all of you including Dr Irani that we are actively working at the system where there is a much greater certainty of law being applied.I know once that is done there will be reactions but we are quite ready for that.
Coming to the two points that I wanted to mention to this particular gathering - the new dimensions of corporate governance - I think basically I would have mentioned only two sides: the concerns arising out of the current world wide crisis in financial systems and structures. I think that is a major area, there are lot of issues there. I think NFCG would need to organize a separate full day workshop to really start looking at that. But that is something that we need to take in to account when we are talking of corporate governance over the next few years.
Second is, a very interesting thing which I have discovered that corporate social responsibility is apparently becoming more and more important within the overall corporate governance framework. Though I still have heard debates and people say that corporate governance is something different and corporate social responsibility is something different. All sorts of debates are going on but issues of equity and sustainability are certainly becoming more and more important considerations in corporate strategies. Boards are certainly seeing more and more role for themselves with respect to society and community and we all seem to be moving one step forward from the mantra of PPP - public private partnership to the fourth P saying people public private partnership. I think all around there is a lot of appreciation of the fact that this is bound to come. As a result of all these, what I seem to be seeing is that corporate social responsibility and inclusive growth have major overlaps. Corporate social responsibility and through that the corporate's role in ensuring inclusive growth for the country is becoming more and more important. In fact NFCG, my ministry and CII had organized a two-day summit in Delhi earlier this month and there appears to be a strong consensus. I heard the Chief Minister of Rajasthan, a number of MPs, people from all over the world and a huge number of representatives from the corporate sector, all seem to be talking of governance, not corporate governance. I see that trend happening and the reason is obvious. The Government is looking for more and more partnership with the private sector, with the professionals, with the experts, with the institutions. The role of the partners is increasing. These are the two things, which I want to briefly mention in terms of the canvass that corporate governance may cover over the coming years.
Way forward: If anything has to go forward, you need institutionalized systems in place, which work. Individuals however brilliant, leaders however charismatic cannot replace institutions. They need to be supported by institutional structures. They can put in place institutional structures but just as Damodaran was saying about the bathtub, baby and the water I think the same thing applies here. If you don’t have the institutional systems and backups, no amount of efforts will succeed. That is where I have two thoughts. First is the National Foundation for Corporate Governance (NFCG) as an existing structure. When I joined this ministry, for the first four months I spent a lot of time on NFCG. I made sure that the council has the minister as the chairman, Mr Narayana Murthy is the Vice Chairman and the Secretary of the Ministry is other Vice Chairman, it has Chairman, SEBI, Chairman, IREDA, Chairman of Indian Banks Association, president of CII, DG CII, President of ICSI, ICAI, Secretary ICSI, ICAI, Secretary DPE, Secretary banking on its board– it is a high power board. The board has a clear vision, but what I found over a period of time is that everybody seems to be doing his/her own thing in corporate governance. When you talk of corporate governance, different people have different definitions, everybody, every industry association, every corporate house everybody is doing a lot but I did not find a single place, which puts it all together. That is the role the board of NFCG saw for itself. It said that that NFCG should be a facilitator. It doesn't look at NFCG as the apex of corporate governance thing but as a great facilitator, as a clearing-house of information, as a facilitator of having a shared vision and to make sure that the efforts are aligned to each other.The difference between iron and magnet is only the alignment, which converts iron into magnet. That is one institutional structure, which is in place. I would request all of you to make use of NFCG a little more in institutional sense.
The other thing is an institute which has been approved by the Cabinet earlier this month, which the ministry is setting up: the Indian Institute of Corporate AffairsThis institute has taken shape because we felt that the ministry to actualize and operationalise the vision it set for itself needs institutional support and this institution is the result of this. I would not take much more time to explain what it is but let me just say that this is going to be a very strong platform for corporates, governments and professionals to work together on all issues that impact on corporate functioning. We are in the process of crystallizing the vision. But let me give you two of the many possible formulations. One is to redefine the corporate landscape in India.This may sound ambitious but these are the kind of thoughts which are running in our mind to redefine the corporate landscape in India for thriving on future shocks through ethical, sustainable, competitive business strategies with corporates and government working in partnership for inclusive growth and global fitment. The another formulation is a holistic think tank, capacity building, service delivery institute - to help corporate growth reforms and regulation; to synergize knowledge management and partnership; and problem solving in a one stop shop mode.There are many other things that we want to do. The ministry is in the process of setting up this institute and would be quite happy to welcome your ideas on this and to partner with any or all of you in taking this forward.
Let me end by complimenting Rajesh and his team on organizing this event and I would like to thank all of you for your participation.
Edited transcript of the Special Address by Mr. Anurag Goel, Secretary, Ministry of Corporate Affairs, Government of India & Chairman, Board of Trustees, NFCG at National Conclave on Corporate Governance in India organized by NFCG on 27th May 2008 in Mumbai.
A Chairman’s view of the Boardroom
- Mr. Y C Deveshwar,
Past President CII &,
Chairman, ITC Limited
Good governance has only one aim and that aim is to create value under competitively challenging circumstances. There is a need for rewarding shareholders because it helps to access one very important resource i.e. financial capital, which helps to grow your company. Therefore, to win the confidence of shareholders, existing and potential, and money markets, it is extremely important that value is created for them.
We live in a society and we are its integral part, business is only an economic organ of the society specifically charged with economic function, but it impacts other stakeholders. It impacts social structures, income distribution, environment and ecological balance. Depending upon the type of industry, how much green house gases you’ll emit, how much of natural capital you utilize - it has a long-term impact on society. It is not only the shareholders return that companies can merely account for. They also have to be accountable for the value impact they create on society at large. In an emerging economy such as India, more and more resources are now being managed in private hands and we're growing at a very fast pace at around 9% of the recent past and our next five-year plan is envisioning that we could by the end of the plan reach a double digit rate of growth. In India, the population is 17% of the global population but the land resources are merely 2.4%, the water resources are 4% and the forest resources are just 1%. We can visualize that if everybody in India as a result of high rate of economic growth has a sense of well being not only financially but also quality of life, then only we can visualize how much of natural resource would get utilized and sustained. Unless all of us begin to look at our long term accountability to society with not only uni-dimensional view of business, which is returns to shareholder capital, but also return on societal capital, which is a triple bottom line approach.
It is very easy to envision that it is important to get shareholder returns because if shareholders are unhappy there may be no business. So, for the company to survive, there has to be value creation for the shareholder. But if a company can in addition to creating shareholder wealth also be able to create societal wealth, then it will in the long run get powered by reputation asset called branding. We also agree that over a period of time, consumers would begin to view the companies' products emotionally.
What is corporate governance? What is good governance? Good governance is using shareholders' resources as trustees in a manner that can provide long-term shareholder wealth, create long-term reputational asset, ensure societal resources are used carefully and additional values are created for stakeholder, whether inside the organization or outside. When balance sheets are analysed, we find they do not give a clue as to what is the long term sustainability of the enterprise, because all the vital interests, the brand equity, reputational asset, values, quality of leadership, vitality of human resource, collaborative culture, its alignment to the end goals, innovative capacity, entrepreneurial energies, all these being even more important than the financial assets are not available in the balance sheets. We know that India is getting next to Japan, the second highest private equity, because of the reputation created by the Indian entrepreneurs. If we have this vitality inside our corporation then that becomes a means to create perpetuity, a means to enable the organization to revitalize, reinvent, re-energize itself and remain contemporary with the current and emerging needs of consumers and for the rest of the stakeholders around. So this vitality is extremely important and that really cannot be measured by some code.
There are principles of good corporate governance around the world but practice has to be adapted accordingly to one's own circumstance.A decade ago, British companies had no outsiders on their board. Since we’re an emerging economy, a lot of entrepreneurial energies along with global best practices in terms of the principles and concepts of good corporate governance are required to be able to grow. But its application has to be according to the special circumstances. The conventional wisdom was - stick to your knit as the global economies are opening up with high level of competition and don’t do anything other than what you have done always. But today, the top Indian business houses that are really performing are diversified companies because of the emerging economy with large opportunities. However, there are constraints related to financial and management resources and also the institutional strength of organizational skills is not that widely available. People with the management capacity and financial resources, can actually in the emerging economy, play and leverage the institutional strengths and create unique sources of competitive advantage.
There are three things that create value for an organisation and these are its values, vision and vitality. These all interact with each other. Suppose, you have a large capacity you will revise your vision to be more broader and futuristic, more encompassing, but values really guide what you will do and not do in reaching your vision in mobilizing the vitality.
The subject of my topic was the Chairman's view from of the Boardroom, but I add to it a little bit more and say- of and from the boardroom. The term 'Board' is an amalgam of the above-mentioned three things i.e. values, vision and vitality - what are its values' quotient - how deeply it is committed to them. It is not what you write on a piece of paper and circulate in your organization, it is your body language, your day-to-day conduct. It is what you practice, not only when the times are good but also when there are downs. It is extremely important that the composition of the board has diversity in it. People with different backgrounds and adaptive skills are better to bring multiplicities of skills.
The point I want to make is that I am not so much enamoured by concentration of power and therefore create mechanism so that there is nobody who is powerful. My formula particularly for emerging economy would be to empower, because to exploit the growth circumstance, you need empowered people. Empowered doesn’t mean only one man, the organization has to be empowered at each level. It has to be distributed leadership. One person cannot manage a large organization such as ITC.
The task of the board is to ensure that the systems, processes, practices and enough empowerment are there with the right quality of people, with right skills.. For taking decisions dynamically, exploiting the opportunity, assessing the risk and creating value, there has to empowerment. However, with high degree of empowerment there should be simultaneous high degree of accountability also. So instead of elimination of power there would be empowerment and systems of accountability. Suppose, you give your chief executive a job and everyday you tell him to do this or that, then that is not good. Empowerment should be free from management, but within a framework of accountability, which has good systems of transparency, processes, information flow and no distortion. This is the key message that I wanted to give you and one reason why ITC has succeeded despite not following the conventional wisdom. Another thing is that dynamics of the board also depends upon the ownership. The governance systems in U.S. and U.K. companies have emerged, because majority of them have institutional shareholders, who were in the driving seat, therefore their management and ownership was divorced, so you get an agency to manage, which is the board. Therefore, it is important to get a link through governance practices between the shareholders and the management through the board.
Now in our company we have created three tiers – this is a unique system. In 1996, we had to struggle because the management said that India is a great opportunity and we want to diversify and use skills that we have in creating larger value. Overseas shareholders can grow, because they can grow through even a shrinking market, they can grow through acquisition, so our overseas shareholder will benefit, whereas our shareholders, who are also 68% would not grow. They would not have the opportunity, so we had this little bit of disagreement, we had some challenging times, but we had other shareholders, who were institutional shareholders - about 34%. It so happened that board managed to get an idea of creating value – not only shareholder value by high rates of growth but also creating this two others legs of the triple bottom line.
As per this three tiers system, at the top is the board, whose role is to do strategic supervision, in the middle we have a corporate management committee - whose role is strategic management, and at the bottom we have business heads and divisional committees – whose role is executive management. So what we have within ITC are focused businesses because it is always easier to handle one thing than handle many things. That is why we created companies within a company, and each of these business is a strategic business unit headed by our chief executive and a divisional management committee and their role is nothing else but to succeed in that business in their own competitive environment. I can also tell you that the way we yearn about it is create focus business where at the same time an umbrella can be created within which institutional strength for ITC could be made available to people and have lot of mechanisms for alignment including ESOPs, incentives and collaborations, so that everybody is pointing in the same direction. We want everybody to be aligned with the stakeholders, when it pinches to the stakeholders, it should pinch everybody, but I agree that there has to be a balance. It should be such that it should not corrupt, it should not bring short-term orientation with the independent or non-executive director.
The message is that it depends upon which country you are operating, what is the kind of economy, the environment, the size of your company, what is the nature of your business, single or multi-business and innovation, lies in creating governance mechanism and strategy of organization as the key inputs into governance, so that you are able to synergise and create dynamism within your organization and be able to succeed and create wealth along the triple bottom line.
Edited transcript of the Address by Mr. Y C Deveshwar, Chairman ITC limited at CII‘s Governance Series organized jointly with NFCG on 23rd March 2007 in Bangalore.