Abstract
Jayati Sarkar and Subrata Sarkar both recognised scholars in the area of Indian Corporate Governance have brought out a comprehensive book which address issues related to the current state of corporate governance in India? In particular, the authors expound the effectiveness and applicability of corporate governance mechanisms in the context of the institutional structure within which Indian companies operate. The foreword by Stijn Claessens catalogues the main issues of Indian corporate governance. Each chapter of the book deals with the key issues of corporate governance in India. First, the book provides an overview of the reformations in corporate governance in India on various occasions. It also takes into account the importance of various reforms and their impact on corporate governance. Second, the ownership structure and its relationship to performance are of prime importance. It should be noted that this point has not only been made in the Indian context but comparisons have also been made with the US, UK, Germany and other emerging economies. In the Indian context, the role of family ownership in particular has been highlighted. Consideration has also been given to the emerging Indian market and its impact on the Indian corporate governance. The role of institutional investors is at the centre of emerging economies. The book notes the investors’ concern in detail. Third, the book brings to focus the role of various stakeholders and internal corporate mechanisms. This is particularly educative in terms of how corporate governance happens and what measures can be taken to improve it. Fourth, the domain of accounting and auditing has been examined and a fresh perspective has been provided. Issues such as employee representation, interaction with suppliers and corporate social responsibility are new areas of research. These issues have been analysed comprehensively. Enforcement is a very important aspect of corporate governance in any country. In the Indian context however, the strong felt need of public-private partnership is necessary to enhance enforcement. This has been highlighted by giving some tangible evidence on the role of disclosure and enforcement.
This book presents a comprehensive study of corporate governance in general and Indian corporate governance, in particular. There have been a couple of other books in the area of Indian corporate governance which are of conceptual nature. The quintessential concern of Indian corporate governance is that it exists more on paper and less on ground. Corporate Governance in India is a very useful resource for researchers and scholars who work in this field. The present book, the authors assume, would be ‘a ready reckoner’ on Indian corporate Governance. The data which have been used in the book are from Sance Dat Services of 5000 listed companies after 2001. The collection of data, which is hard to get, is remarkable in this respect. This book is a result of scrupulous and timely research on corporate governance in India which the authors have published on various academic occasions. Corporate governance, fundamentally, is a contrivance for shareholders to keep an eye on the conduct of the board. In India, mostly, the auxiliary problem is of overriding the shareholders who control the most and dominate the least.
What is specific about Indian corporate governance? In India, though the term ‘Corporate Governance’ is new; the concept is old. It dates back to the sreni system which was responsible for smooth functioning of ‘business activities’. In fact, India is one of the few countries which have the concept for a very long time. However, the present structure of corporate governance in India is basically British. During British period, it functioned through the mercantile agency house, set up in the main trade centres in India. This benefitted mainly the East India Company. It later developed into the Managing Agency system that initiated the private sector partaking in business. Basically, these agencies were financed by individuals who later were termed as promoters. These promoters, unlike professionals, not only controlled but also ensured the smooth functioning of the organisation. This resulted into Joint Stock Companies with family as the major shareholder. Consequently, every organisation with family control gave birth to the family-owned organisations.
Studies of corporate governance have become the pertinent issue in countries such as India and China due to the ‘market-oriented economy’ which they have adopted from 1990s. The prefatory note states the objective of the book which is based on the ‘comprehensive analysis of the evolution of the various corporate governance mechanisms in India since liberalisation’ (p. xxvii). It has become a policy issue in almost every developing country. The failure of Satyam Computers Limited has brought the issue to fore in the Indian context, apart from the major US corporate scandals (for example, WorldCom, Quest and Tyco) which highlighted the issue in the world context.
The concerns for effective investor protection, transparency of operations in the industry and international standard of disclosure in financial operations have strongly been felt in the liberalised Indian market. The nine chapters of the book seek to address the same in detail. They cover: Overview of Corporate Governance, The Corporate Governance Framework in India, Agency Problems in Indian Corporation, The Role of Large Stakeholders, The Board of Directors, Executive Compensation, Auditor and Audit Committee, Market for Corporate Control, Disclosures and Enforcement. Each of the aforementioned chapters can be read in isolation without referring to the preceding one. This is due to the fact that the studies on Indian corporate governance have been done and published over the years in the form of research papers by the authors. The authors have tried to structure each chapter in a logical manner. Each chapter proceeds with the findings of existing research in both developed and developing economies. This is followed up by ‘a detailed account of regulations existing in India with respect to corporate governance mechanism under consideration’. Each chapter concludes with the analysis of relevant data and research findings, emerging trends, and the way forward. This is a significant departure from existing trend in the chapter division and organisation.
The first chapter, Overview of Corporate Governance, covers the definition of Corporate Governance, the nature of the governance problems, objectives of corporate governance, various mechanisms of corporate governance such as board of directors, the large stakeholders, financial structure, the market of corporate control, and product market competition. It also talks about the frameworks such as legal, political, cultural and environmental frameworks which constitute the bases and quality of corporate governance. It also includes the disclosure norms, accounting and auditing rules, and enforcements of such laws. In addition, typology of governance system is a useful addition for the new reader. It introduces the fundamentals of the corporate governance. Additionally, the problem of investor influence in emerging economies has been underscored. The aforementioned problem is due to the evolving nature of economies, which have a long history of active institutional investors influencing corporate governance. In India the problem is due to the fact that Indian firms are characterised by concentrated ownership and control structure.
What are the governance problems in India? Two main types of governance systems prevail: the market based Anglo-Saxon system of US, UK, Canada and Australia; the bank-based/network based systems of Germany and Japan. Apart from the aforesaid systems a hybrid exists, ‘that is a convex combination of the two’ (p. 43). As a result, two kinds of problems emerge in corporate governance out of these three prevalent systems: Type I and Type II. When there are dispersed shareholder Type I agency problem arises; when the ownership and control are concentrated in the same hands Type II agency problem occurs.
Two different systems have been observed: the market based and the bank based. The market based system (dispersed shareholder) is characterised by the separation of ownership and control, liquid capital market, an active market for corporate control, and securities market. The bank-based system (concentrated shareholder) is characterised by greater concentration of shareholder power with banks, companies, families, government, less liquid capital market, and inactive takeover market. In the latter case banks play an important role in mobilising savings and allocation of capitals. Additionally, banks also monitor the decision regarding investment by corporate managers. It has been observed that the governance system of most of the developing countries fall under the bank-based network system with the family occupying the centre stage. As far as Indian corporate system is concerned, it comes under the ‘hybrid’ category of market-based and bank-based systems. However, almost all the major committees of India have identified Type II agency problem in the Indian context. Naresh Chandra Committee on Audit and Governance has put special emphasis on the favour of minority shareholders. The third chapter, Agency Problem in Indian Corporations, revolves around the ‘governance problem in Indian companies from agency perspective’ (p. 129). For this purpose the authors analyse three major family business groups in India: TATA, Reliance and Aditya Birla. It mainly deals with the equity ownership problem from the historical point of view. This chapter focuses on the internal and external mechanisms of governance in Indian companies.
The fourth chapter, The Role of Large Shareholders, focuses on the relationship which has been asymmetrical between insider-ownership and company performance. Prior to liberalisation the government owned agencies were the main household investors. After 1993 however, private sector mutual funds were allowed and in the next 13 years, a considerable participation was observed. This change has brought a significant amount of heterogeneity in objective and incentive unlike the government owned agencies. The book considers the of family control issue where the owner of the company holds the managerial position. This practice discourages the role of outside stakeholders.
How will this book help policy makers in corporate governance reforms in India? Board Governance in India—Way Forward provides some valuable suggestion in this regard. The fact of The Board of Directors is placed higher than the rest is a crucial part in the entire mechanism. In India, this part seems more prominent than others because it ensures the participation of the small shareholders. Unlike the other chapters, the chapter on board of directors offers some ways to strengthen the independent directors. The authors draw attention to the various components of the board of directors which would help policy makers in governance regulations.
The authors propose to reframe the regulation regarding board composition. There should be a mandatory Nomination Committee which would enhance the elements of freedom and independence in terms of outside shareholders. The emphasis has also been laid on the effectiveness of the board process so that independent directors can operate smoothly. The independent directors should act as monitors rather than advisors which would reduce the major part of corporate governance problem. At last, independent directors should be given proper brief about their rights and responsibilities. It will, in effect, enhance their understanding of the nature and responsibility of the position.
The chapter, Auditor and Audit Committee offers another significant input for policy makers. It studies the relationship between the management and the audit committee. Particularly, in the Indian context where the audit partner rotation and independent quotient are inadequate the effective and strong governance practices are hindered. This chapter points out the issues which have not been covered in the Companies Bill of 2009. The issues are related to the independence of audit committee both in terms of composition, power of the Board to overrule its decisions, and to conflict of interest in auditor-company relationship and audit partner rotation’. As the authors rightly put the information part is very important in this case. It also mentions all the legalities involved with audit committees around the world and compares them with Indian scenario.
Chapter 6, Executive Compensation, is an extension of the previous chapter on Board of Directors. The authors, it seems, have devoted a separate chapter to it because of the finances involved.
By introducing market for corporate control, the authors reveal the other facet of the corporate governance. The role of market is very significant in corporate governance. It ‘allows control to change from the current management to an outside raider whenever the raider believes the firm is not being run efficiently’ (p. 411). Corporate control is, thus, a tool which disciplines the ‘self-serving managers’, particularly in developing economies like India. A major part of the chapter discusses the takeover activity and the role of SEBI in India. This is very useful information, especially for researchers in the area of corporate governance in India. It also offers insight for the policy makers under the title ‘Takeover Regulations: Way Forward’.
The concluding chapter, Disclosure and Enforcement, outlines the most sensitive aspect in the corporate governance. Credibility of the message is an important tenet of disclosure process. Owing to the sensitivity of the message, it should be ethical. To make certain the ethics of disclosure, several mechanisms operate. The most important is the auditing system (external and internal) which determine the credibility of disclosure. Almost every committee in India has focused on this part of corporate governance. Apart from the theoretical background, the historical part of corporate disclosure traces its origin to Kautilya’s Arthshastra which gives it a holistic perspective. However, it would have been better if the book would have elaborated more on this point by mentioning the specifics from the text as is done in the case of sreni system. Enforcement is the key to Indian corporate governance. Authors suggest that the area of enforcement need more attention as it is not at par with ‘the best in the world’ (p. 512).
The book is a pure delight for researchers and policy makers. One notable aspect of the book is that it compares Indian governance with the developed countries’ governance systems which makes the study comprehensive. A separate mention of corporate social responsibility, which has been mentioned in brief, is missing from the book. Instead of relying on research data and views from the scholars on the importance of CSR, the authors could have judged it from ground reality. In general, the book is a pure data based research outcome.