Download The Crisis and the Future of Corporate Governance Irish Stock

February 2010
Anne E Molyneux
Director – CS International
Prime Minister, Dr. Manmohan Singh on CG
 “Unless Indian firms come to be recognized world
wide for good corporate governance, they will not be
able to compete globally in an increasingly interdependent integrated world”.
 “In the era of protectionism few bothered about
corporate governance and transparency in accounting
and in management. Such laxity, however, is no longer
possible”.
 At ICAI Diamond Jubilee Celebrations - 1 July 2008
CPSE scorecard
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242 CPSEs, 41 listed, 22 sectors
41= 20% of market cap of BSE
Dominate in utilities, transportation, coal, oil, gas
Significant in steel, fertilizer, aluminium, copper and
electricity machinery
Produce 8% of GDP on value added basis
25% of GDP in gross sales
2% of GDP in profit terms
Significant control in significant sectors
Employs 1.57 million
CPSE scorecard
 Top 10 CPSEs
 2006-2007 increased income by 15.2%
 2007-2008 increased income by 12.2%
 Net profits fell slightly
 Most profitable predominantly in extractives
 Bottom 10 -least profitable in deregulated industries,
making losses for a number of years
 Other CPSEs
 140 profitable, 53 loss making, others marginal
What good CG seeks to achieve?
 Part of broader economic reforms – apply market discipline
as far as possible and show public sector leadership
 Performance
 increase value for India and Indians
 improve performance, competitiveness and efficiency of
public sector
 achieve strategies and manage risk
 Conformance - transparent, accountable decision making
in compliance with laws and regulations
 Strong oversight and review of decision making (financial
and non-financial), reporting, internal control systems,
and mechanism for investor grievance attention.
Limitations
 No perfect structure or model
 How to achieve independence of boards – role of controlling
shareholders (government or family)
 “Independence” of independent directors
 Capable directors : supply issue
 Checklist approach to compliance (vs. spirit)
 To what extent, can regulators regulate greed, dishonesty and
unethical behavior…
Evolution in private sector
 1998 - Desirable CG Code for listed companies by CII
 2000 – Recommendations of Kumar Mangalam Birla Committee
implemented - Clause 49 introduced
 2002 – Naresh Chandra Committee Report and banks ( Dr Ashok
Ganguly)
 2003 - Recommendations made by Narayan Murthy Committee
(implemented in 2004)
 2005: Irani Committee Report on Company Law constituted by MCA
 Various Committees factor in international practices and developments
- Narayan Murthy Committee was set up in the aftermath of major
corporate developments in US (Enron/WorldCom / SOX)
 NFCG set up by MCA – interact with national and international
agencies
 Comprehensive self assessment in 2007-08
Evolution in public sector
 Phase 1 - 1991 New Industrial Policy – greater role for private sector –
more competition, partial sale of shares (on BSE , then in large lost),
disinvestment, deregulation, liberalisation
 Phase 2 - Mid 1990s – more decision making to CPSEs, esp. Navratnas
(originally 9 now 18); 1997 DPE Guidelines – special status for some
cos.
 Phase 3 – to 2004, disinvestment and privatisation, esp listing on SX,
therefore requirement cos comply with listing rules and CG
requirements
 Phase 4 – 2004 to today, National Common Minimum Program,
reaffirmed commitment to state-owned sector; 2007 DPE CG for all
CPSEs
Framework for CPSEs
Legal
 The Companies Act, 1956, s. 617, ‘govt companies’ – 51% o’ship
 Listing Agreement (Clause 49) – SEBI Act, 1992
 Mandatory
 Voluntary provisions
 For listed companies - other SEBI Regs. (not just clause 49)
 Other
 DPE guidelines
 Guidelines on CG for SOEs
 Other:
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Right to information
Labor
Insolvency
Other acts and regulations – competition, environmental, banking/securities,
insurance/sector regs
Institutional – shareholder role is complex; oversight and regulation
also complex
Structure
Main features of Clause 49:
 Composition of Board
 Compensation / Remuneration of non-executive
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directors
Constitution of Committees
Disclosure norms
CEO / CFO Certification
Reporting requirements
Risk management framework
Whistle blower mechanism – non mandatory
Main Report Recommendations
 CG reforms - seen as part of the broader reform program
 Focus efforts on the profitable companies - navratnas and miniratnas
 Deepening CG reforms requires:
 Strengthening the state’s ownership role;
 Professionalising CPSE boards;
 Enhancing transparency and disclosure.
 Implementation of reform requires careful management
 Future steps
 Strategy for CPSE reform
 Revision of the CG Guidelines
 Monitor compliance with CG Guidelines
 Company level reforms
 Enhance DPE capacities to do all this
Transparency issues re government obligations,
relations
 Move to more centralised ownership model– to arm’s
length ownership/shareholder perspective
 Ensure clarity and cost of non-commercial obligations
 Apply, as far as possible, private sector CG norms to
public sector commercial enterprises.
Transparency Issues
Board appointment process – an independent process, yes
but.......
 Minimize political
interference
 CMD
 Independent directors
 Functional directors
 Nomination committee
role
 Focus on competence
and commitment –
search criteria
 Pilot in few navratnas
and transfer to rest
 Reduce ACC/PESB role
 Reduce focus on
appointment of civil
servants
 Remove preference for
functional directors to be
internal candidates
Audit committees and independent directors
 Clause 49 – min 3 dirs (2
independent dirs)
 CA requirements in unlisted cos
- min 3 dirs (2 independent
dirs)
 VIP role in getting oversight and
compliance right, inc internal
controls and risk management
 Need:
 More independents from
private sector
 Board and A/C evaluation
process
 Make it mandatory for all
statutory companies to form
audit committees
 Non-compliant composition re
independent directors
 No audit c’tee formed, not meet
number of 3, not 2/3 independents
Transparency re board/director/committee evaluations
 Clause 49 – non-mandatory
recommends evaluation of nonexecutive directors, by peer
group of rest of board excluding
the persons to be evaluated
(rarely done)
 Need:
 Systematic board, board
committee and individual
director evaluations
 Related to performance
targets, committee activities
and relations with board and
management, and
 Relate to board/director
development programs for CIP
 Only requirement is that
administrative ministries review
performance of directors at end
of first year , prior to
confirmation of rest of tenure
 Clause 49 no evaluation of fulltime directors or of independent
directors
Transparency – enhance disclosures
 Regulations re disclosure are well established but...
 Limited monitoring
 Need to improve:
 Submit quality accounts presented according to
international accounting standards in a timely manner
(not late and require restatements)
 Improve disclosures re related party transactions, noncommercial objectives, social obligations, ministerial
requests/directions, MOU targets and target areas
 DPE and ministry monitoring of disclosures including
public reports on this
Transparency – strengthen audits and control
 Quality statutory audits to international standards by
independent firms appointed by CAG
 CAG audits: compliance audit, test audit of statutory audit,
performance audit
 Weakness in audit committee oversight of and
implementation of internal controls, internal audit risk
management and disclosure processes
 Need in each CPSE:
 Independent directors on mandatory audit committees
 Stronger risk governance and systems
 Likely to need improved capacity and guidance in this area
Transparency and disclosure - conclusions
 Forward plan for reform - DPE, CAG
 Clarity re govt obligations, disclosure requirements and
requirements re related party transactions
 Rationalise supplementary audits and performance audits
 Support for CPSEs
 Director appointment and development programs, especially
re evaluations and audit committee activities
 Increased understanding and implementation re risk, control
and internal audit and quality disclosure and reporting
practices
 Increased monitoring by ministries, DPE and CAG and
public reporting on this.
Transparency and Disclosure - Discussion
 Actions
 How do we achieve these goals? What changes will be
easiest to tackle?
 Barriers
 What obstacles may we meet? What are the issues?
 Solutions
 How do we overcome the obstacles?
Discussion- specific questions
 1. Do CPSEs have too much reporting and audit requirements? How
can these be made more cost effective without reducing disclosure?
 2. How can CPSEs more effectively disclose non-commercial
obligations, including those mandated by GOI? Similarly, how should
CPSEs disclose transactions with each other and their administrative
ministries?
 3. How can DPE and the ministries help CPSEs to implement
disclosure requirements?
 4. How can DPE and the ministries better monitor CPSE disclosure?
 5. How can CPSEs introduce and improve performance of audit
committees, and internal audit and control systems?