PROBLEMS UNDER INDIAN MODEL OF CORPORATE GOVERNANCE Author : Ms. PALLAVI S G Co-Author: Ms. GOGULA MADHAVI LAKSHMI | Volume II Issue V |

ABSTRACT

In this Research Paper I am going to discuss about Indian model of Corporate Governance and problems in the model. After seeing Indian companies failing in these recent times it is important for us to understand problems in the model. Here I am saying to look into the system because at the end system is following the model so any reasons for the failure is directly connected to model. I have identified major problems which is causing problem till date and also appropriate solutions for the same by referring to other models, especially US model because they have faced similar problems and adopted some of the measures.

LITERATURE REVIEW

• (Singh. 2010) The researcher has found out that there are sufficient rules and regulations in the law but there is a problem of implementation of those rules and regulations, Researcher has also suggested that there should be a continuous review of an independent regulator, He has also noticed that the auditor and audit committee should work hand on hand to enhance the consistency factor of accounting documents. He has also examined that the Satyam was just a loophole rather than the rule.
• (Chandrani.Chattopadhyay 2011) The researcher has investigated the problems faced by the PSUs in India. As the ownership is with the government and the they used the tax payer’s money for their operations. He has tried to find out the failure to sustain Corporate governance. He has found  out some  issues  which  includes contradictory  objectives,  extreme  government interfering,  lack  of  commercial  and  managerial  self-sufficiency  and  absenteeism  of  self-governing directors. The PSU has its own features but it should concentrate on the impairments of corporate Governance and bring out the transparency and accountability.
• (Singhal 2012)  The researcher has investigated the importance of corporate governance for the new developments in a worldwide viewpoint. They have also compared major issues of  PSU in India,  there  performances  and responsibility with  public  sector in India.  Managerial autonomy, board  structure,  roles  undertaken  by  nonexecutive  directors and compliance with SEBI policies for planning and executions. These are the factors they have gone through in their research. Researcher has also suggested that government should frame good policy for each PSU to safeguard its effective working and suggest severe CG practices for  the  unlisted  PSU    Managerial  reward,  endorsement  of  projects  and performance  management  systems  barring  matters  of  national  interest  should  be  kept resistant from part`isan and government involvement by PSU.   The standards should be set by  the  government  to  employ  capable  experts  as  board  members  who  have  a  good understanding  of  the  business  and  the  sector.  Implementation  of  corporate  governance norms  for  both  listed  and  unlisted,  should  be  supervised  consistently.  The government required to pay continuous attention on the performance of its Board of directors in cases where it acts as a promoter.
• Rujitha T R (2012), Researcher has found that the objective of the audit committee has to be continued to include mistake of risk management control systems to create an environment for the obedience to the practices of good corporate governance. Since audit committee plays very important role in the corporate governance so continuous monitoring is     The role of audit  committee gains  more prominence  as  there is  a growing  concern  about the  quality of financial  statements  for  the  protection  of  stake  holders  interest.  To  ensure  the  effective implementation  and  compliance  of  standards  of  corporate  governance  by  SEBI  rules  and regulations is a need of an hour at the ground level.
• (V.N., 2012) The researcher has concluded that the provisions of Corporate Governance should be  harmonized  to  facilitate  easy  compliance  and  economy  for    He has suggested some key areas for good Corporate  Governance  that adopt  formal and transparent process. Segregate the roles of CEO and the chairman of the Board. Evaluate the performance of senior management team and CEO annually. Peer evaluation of Independent Director should be adopted. He has also suggested that we should understand the risk, strategy and business models, they should also have effective oversight of internal and external auditors, encourage companies to introduce whistle blower policies.
• (Gopal, 2013) Researchers have  investigated that  good  corporate governance  depends upon  the  effective  board,  the  independent  auditors,  role  of  professionals  and  the  effective legislation. According to them to  improve corporate  governance certain  issues need  to solve. These issues are effectiveness of board, the auditor, role of professionals and the legislation. 
• (Ravi 2016) It is a case of collective failure of the system in India. Ruling party and opposition parties played  a  blame    Appointments ofCEO through political involvement. Bank has not made the official complaint. He has provided the solution of this problem in India is to  provide teeth to the watch dog organizations like SEBI, grant more powers to investigating agencies like CBI, ensuring more accountability from public banks, strengthen  the  other  supervisor  institutions  and  decongest  courts  and  bringing  culprit  to swift justice.  The corporation  must be made to follow  the corporate governance practices both in letter and spirit is suggested by him.
• Lisma L et al (2017), Researchers have examined that the basic concepts of transparency were an attitude or action of the company to disclose entire business and information material about the effects that can affect the decisions of investors or other stakeholders. They proved that information disclosure is determined by 3 (three) factors: clear, accurate, and timely. In applying the principles of transparency, the board of directors is responsible for providing information to stakeholders both internal and external. The application of the principle of transparency in the limited company shows that the level of transparency tends to be higher in term of nonfinancial information, but instead tend to be closed when it comes to financial information, particularly on the closed company or not a public company.

STATEMENT OF THE PROPOSAL

1. Problem Statement:

In Our Indian Corporate Governance we can see most of our Board of Directors are Friends or Family members. If the Board is in awe of the family executive, it makes it difficult for the Board sometimes to ask tough questions or at other times the right questions at the right time in order to serve the interests of the shareholders better. As a result, truly independent directors are rarely found in Indian companies. Serving on multiple boards is problematic because doing so can overburden directors, thus hampering their performance, and increase the potential for directors to experience conflicts of interest between the various corporations they serve.

It is admitted that contribution of the independent directors is limited because the average time spent in Board meetings by these directors is barely 14 to 16 hours in a year. In some cases, it has been found that no proper training and orientation regarding the awareness of rights, responsibilities, duties and liabilities of the directors is provided to an individual before appointing him or her as a director on the

Board. Also there is unseen but active participation of political class.

The directors on the board are largely reliant on information from the management and auditors, with their capacity to independently verify financial information being quite limited, while auditors, as this case suggests, have also been equally reliant on management information. The relevant issue here is the extent and the depth of auditors’ effort in their exercise of due diligence. Excessive reliance on information from the management is symptomatic of the ownership or control of companies in India by business families, and that poses a particular challenge for corporate governance in India.

The greatest drawback of financial disclosures in India is the absence of detailed reporting on rematch party transactions. In addition, poor quality of consolidated accounting and segment reporting leads to misrepresentation of the true picture of a business group.

When we see in Indian Model, the two audit-related issues which are commonly recognized are that of auditor independence because of the large if segmented market in accounting services, and the perceived powerlessness of auditors in the face of corporate pressure. In many cases, they are ill-equipped to handle the needs of large companies, because in the face of an audit failure, it is very difficult to discern whether the auditors were complacent or whether they were pressurized by the concerted efforts of the insiders. There is no proper system to monitor the work of audit firms or to review the accounts prepared by the company’s statutory auditors.

1. The Research Question:

1. Whether excluding the Blood related person in the Board helps Indian Corporate Governance model to work more efficiently?
2. Whether Independent Directors are appointed for the benefit of the Board to achieve their personal gains in the Company?

• Is Transparent communication about Financial Report to the authorized person who has right to check the report will avoid failure of Corporate Governance?
  1. Hypothesis:

When we look at Anglo US model their Composition of Board of directors includes both “insiders” and “outsiders”. An “insider” is as a person who is either employed by the corporation(an executive, manager or employee) or who has significant personal or business relationships with corporate management. An “outsider” is a person or institution which has no direct relationship with the corporation or corporate management. A synonym for insider is executive director; a synonym for outsider is non-executive director or independent director.

So if we adopt the same then there will drastic reduce in the abuse of power inside the corporate sector and there will not be concentration of power in one person’s hand also when the employee or a manager be the part of the Board then there will be increase in the efficiency of that person in the growth of the Company and it also helps in growth of the Company.

On the other hand when we talk about pressure which Auditor go through to play the number game in the balance sheet. This can be avoided if we make that relationship between Top Management and Auditor should be strictly Professional.

There are three things which are mentioned under Anglo US model :

1. Quality financial reporting can only be achieved through open and candid communication and close working relationships among the corporation’s board of directors, audit committee, management, internal auditors, and external auditors.
2. Strengthening corporate governance oversight in the financial reporting process of publicly traded companies will reduce instances of financial statement fraud.
3. Integrity, quality, and transparency of financial reports improve investors ‘confidence in the capital market while incidents of financial statement fraud diminish such confidence.

When we see the reasons for the past failures of our system it is mainly because of the manipulation in the company’s accounts and who is the responsible for it obviously the Auditor. So it would help our system if we adopt this above mentioned points.

OBJECTIVE AND SCOPE OF THE STUDY

To assess the Problems in our Corporate Model and to consider the failures in our corporate sector for which we are going to find solutions through other Corporate Governance Model followed all over the Globe.

RESEARCH METHODOLOGY

I have used Quantitative method of research where I have categorized some of the Corporate Governance Models and identified some of the best aspects among those models. The data which I collected is from the existing data from which I have selected best and relevant materials. I have done Content analysis in which I have categorized and understood the meaning of the words mentioned in the resources.

 INTRODUCTION

In India there are mainly three types of companies’ viz. private companies, public companies and public sector undertakings. Each of these companies has distinct kind of shareholding pattern. Thus the corporate governance model in India is a mix of Anglo-American and German Models.

Chapter-1

Problems under Indian Corporate Governance Model

If the Board is in awe of the family executive, it makes it difficult for the Board sometimes to ask tough questions or at other times the right questions at the right time in order to serve the interests of the shareholders better. As a result, truly independent directors are rarely found in Indian companies. Serving on multiple boards is problematic because doing so can overburden directors, thus hampering their performance, and increase the potential for directors to experience conflicts of interest between the various corporations they serve[1]. It is admitted that contribution of the independent directors is limited because the average time spent in Board meetings by these directors is barely 14 to 16 hours in a year. In some cases, it has been found that no proper training and orientation regarding the awareness of rights, responsibilities, duties and liabilities of the directors is provided to an individual before appointing him or her as a director on the Board[2]. Also there is unseen but active participation of political class.

The directors on the board are largely reliant on information from the management and auditors, with their capacity to independently verify financial information being quite limited, while auditors, as this case suggests, have also been equally reliant on management information. The relevant issue here is the extent and the depth of auditors’ effort in their exercise of due diligence. Excessive reliance on information from the management is symptomatic of the ownership or control of companies in India by business families, and that poses a particular challenge for corporate governance in India. The greatest drawback of financial disclosures in India is the absence of detailed reporting on related party transactions. In addition, poor quality of consolidated accounting and segment reporting leads to misrepresentation of the true picture of a business group.

Although India’s investor-protection laws are sophisticated, litigants must wait a long time before receiving a judgment. Delays in the delivery of verdicts, high costs of litigation and the lengthy judicial appointment process in words make the legal enforcement mechanism ineffective. According to the OECD, “thecredibility and utility of a corporate governance work rest on itsenforceability.” In India, the two audit-related issues which are common lyre cognized are that of auditor independence (which is a problem worldwide)because of the large if segmented market in accounting services, and the perceived powerlessness of auditors in the face of corporate pressure. In many cases, they are ill-equipped to handle the needs of large companies, because in the face of an audit failure, it is very difficult to discern whether the auditors were complacent or whether they were pressurized by the concerted efforts of the insiders. There is no proper system to monitor the work of audit firms or to review the accounts prepared by the company’s statutory auditors.

However, in the aftermath of the Satyam case, the SEBI has decided to introduce a peer review mechanism to review the accounts prepared by a company’ statutory auditor. In addition, the SEBI has also decided to constitute a panel of auditors to review the financial statement of all BSE Sensex and NSE Nifty companies. Also there is no statutory compliance for .the companies to obtain a report on Corporate Governance Rating by the Credit Rating Agencies in India.

Chapter-2

Possible solutions for the Problems

When we see the US Model It seems self-evident that a board’s role depends largely on the nature and the strategic challenges of the company and the industry. The challenges faced by small, private, or closely held companies are not the same as those of larger, public corporations. In addition to their traditional fiduciary role, directors in small companies often are key advisers in strategic planning, raising, and allocating capital, human resources planning, and sometimes even performance appraisal. In large public corporations, directors are focused more on exercising oversight than on planning, on capital allocation and control rather than on the raising of capital, and on management development and succession activities rather than on broader human resources responsibilities.

Public company ownership patterns are not homogeneous either, and different ownership structures may call for different governance approaches. The first, and most common, board situation is one in which a corporation has no controlling shareholder. In that case, directors should behave as if there is a single absentee owner whose long-term interests they serve. A primary responsibility for the board in this scenario is to appoint and, if necessary, change management, just as an intelligent owner would do if he were present.

In this plain-vanilla case, a director who sees something he doesn’t like should attempt to persuade the other directors of his views. If he is successful, the board will have the muscle to make the appropriate change. Suppose, though, that the unhappy director can’t get other directors to agree with him. He should then feel free to make his views known to the absentee owners. Directors seldom do that, of course. The temperament of many directors would in fact be incompatible with critical behavior of that sort. But I see nothing improper in such actions, assuming the issues are serious. Naturally, the complaining director can expect a vigorous rebuttal from the persuaded directors, a prospect that should discourage the dissenter from pursuing trivial or non-rational causes[3].

The second situation occurs when the controlling owner is also the manager. At some companies, such as Google, this arrangement is facilitated by the existence of two classes of stock endowed with disproportionate voting power. In these situations, the board does not act as an agent between owners and management, and directors cannot affect change except through persuasion. Therefore, if the owner or manager is mediocre or worse, is overreaching there is little a director can do about it except object. And if there is no change and the matter is sufficiently serious, the outside directors should resign. Their resignation will signal their doubts about management, and it will emphasize that no outsider is in a position to correct the owner or manager’s shortcomings.

The third public corporation governance situation occurs when there is a controlling owner who is not involved in management. This case, examples of which are Hershey Foods and Dow Jones, puts the outside directors in a potentially value-creating position. If they become unhappy with either the competence or integrity of the manager, they can go directly to the owner (who may also be on the board) and make their views known. This situation helps an outside director, since he need make his case only to a single, presumably interested owner who can immediately make a change if the argument is persuasive. Even so, the dissatisfied director has only that single course of action. If he remains unsatisfied about a critical matter, he has no choice but to resign.

In India family members will be hold board positions without appropriate knowledge or qualifications but in US model An “insider” is as a person who is either employed by the corporation (an executive, manager or employee) or who has significant personal or business relationships with corporate management. An “outsider” is a person or institution which has no direct relationship with the corporation or corporate management.

So if we can adopt these changes from the US model it will help us in building strong and effective model of Corporate Governance.

Independent Director

Lead Independent Director If the offices of Chairman of the Board and Chief Executive Officer are held by the same person, the Board should name a lead independent directorto ensure a structure that provides an appropriate balance between the powers of the CEO and those of the independent directors. The Lead Independent Director serves as an important liaison between the Board and Independent Directors. Other roles of the lead independent director may include chairing meetings of non-executive directors and of independent directors, presiding overboard meetings in the absence of the chair, serving as the principal liaison between the independent directors and the chair, and leading the Board/director evaluation process. Given these additional responsibilities, the lead independent director should be expected to devote a greater amount of time to Board service than the other directors.

Auditing Committee

On the other hand when we talk about pressure which Auditor go through to play the number game in the balance sheet. This can be avoided if we make that relationship between Top Management and Auditor should be strictly Professional.

There are three things which are mentioned under Anglo US model :

1. Quality financial reporting can only be achieved through open and candid communication and close working relationships among the corporation’s board of directors, audit committee, management, internal auditors, and external auditors.
2. Strengthening corporate governance oversight in the financial reporting process of publicly traded companies will reduce instances of financial statement fraud.
3. Integrity, quality, and transparency of financial reports improve investors’ confidence in the capital market while incidents of financial statement fraud diminish such confidence.

When we see the reasons for the past failures of our system it is mainly because of the manipulation in the company’s accounts and who is the responsible for it obviously the Auditor. So it would help our system if we adopt this above mentioned points.

Chapter-3

Corporate Governance in India Past, Present & Future

Good corporate governance in the changing business environment has emerged as powerful tool of competitiveness and sustainability. It is very important at this point and it needs corporation for one and all i.e. from CEO of company to the ordinary staff for the maximization of the stakeholders’ value and also for maximization of pleasure and minimization of pain for the long term business.

Global competitions in the market need best planning, management, innovative ideas, compliance with laws, good relation between directors, shareholders, employees and customers of companies, value based corporate governance in order to grow, prosper and compete in international markets by strengthen their strength overcoming their weaknesses and running them effectively and efficiently in an efficient and transparent manner by adopting the best practices.

Corporate India must commit itself as reliable, innovative and prompt service provider to their customers and should also become reliable business partners in order to prosper and to have all round growth.

Corporate Governance is nothing more than a set of ideas, innovation, creativity, thinking having certain ethics, values, principles etc which gives direction and shape to its people, employees and owners of companies and help them to flourish in global market.

Indian Corporate Bodies having adopted good corporate governance will reach themselves to a benchmark for rest of the world; it brings laurels as a way of appreciation. Corporate governance lays down ethics, values, and principles, management policies of a corporation which are inculcated and brought into practice. The importance of corporate governance lies in promoting and maintains integrity, transparency and accountability throughout the organization.

Corporate governance has existed since past but it was in different form. During Vedic times kings used to have their ministers and used to have ethics, values, principles and laws to run their state but today it is in the form corporate governance having same rules, laws, ethics, values, and morals etc which helps in running corporate bodies in the more effective ways so that they in the age of globalization become global giants.

Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are some of the global giants which have their flag of success flying high in the sky due to good corporate governance.

Today, even law has a great role to play in successful and growing economy. Government and judiciary have enacted several laws and regulations like SEBI, FEMA, Cyber laws, Competition laws etc and have brought several amendments and repeal the laws in order that they don’t act as barrier for these corporate bodies and developing India. Judiciary has also helped in great way by solving the corporate disputes in speedy way.

Corporate bodies have their aim, values, motto, ethics and principles etc which guide them to the ladder of success. Big and small organizations have their magazines annual reports which reflect their achievements, failure, their profit and loss, their current position in the market. A few companies have also shown awareness of environment protection, social responsibilities and the cause of upliftment and social development and they have deeply committed themselves to it. The big example of such a company can be of Deepak Fertilizers and Petrochemicals Corporation Limited which also bagged 2nd runner up award for the corporate social responsibility by business world in 2005.

Under the present scenario, stakeholders are given more importance as to shareholders, they even get chance to attend, vote at general meetings, make observations and comments on the performance of the company.

Corporate governance from the futuristic point of view has great role to play. The corporate bodies in their corporate have much futuristic approach. They have vision for their company, on which they work for the future success. They take risk and adopt innovative ideas, have futuristic goals, motto, and future objectives to achieve.

With increase in interdependence and free trade among countries and citizens across the globe, internationally accepted corporate governance standards are of paramount importance for Indian Companies seeking to distinguish themselves in global footprint. The companies should always keep improving, enhancing and upgrading themselves by bringing more reliable integrated product and service quality. They should be more transparent in their conduct.

Corporate governance should also have approach of holistic view, value based governance, should be committed towards corporate social upliftment and social responsibility and environment protection. It also involves creative, generative and positive things that add value to the various stakeholders that are served as customers. Be it finance, taxation, banking or legal framework each and every place requires good corporate governance.

Hence corporate governance is a means and not an end, corporate excellence should be end.

[1].(Bhat& Varun,2007).

[2]. (India PRwire Pvt. Ltd.2009)

[3]Buffett, annual letter to Berkshire Hathaway shareholders (1993)