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Corporate Governance: Has it caught up in India?

2008-01-12 11:09:14 Source : CNBC-TV18

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Corporate Governance is an issue that has been spoken about not just in India but globally as well. CNBC-TV18 explores the various implications of corporate governance, its impact on the way the businesses run in this country, its impact on shareholder wealth and profitability.

The President of CII and the Chairman of Bharti Enterprises, Sunil Mittal; Mr KV Kamath, the Vice-President of CII and the Chairman of ICICI Bank and Mr JJ Irani, a man who is really an expert in the field of corporate governance, spoke exclusively to CNBC-TV18�s Shereen Bhan:

Q: This whole issue of corporate governance, several committees being set up - Sarbanes Oxley, Clause 49, it has been spoken about but has it really become a part of corporate India�s DNA from a wealth creation - a shareholder profitability point of view, has that concept really been understood?

Sunil Mittal: I think so; to my mind a lot of things have been achieved in this area. In fact the very celebrations by the investor community of those companies which keep corporate governance as very core has clearly brought a lot others who may not have been true believers in corporate governance into the mainstream because that means extra valuation for them, that means easy access to capital for them and at the end of the day, I think the companies develop very strong image in the society to have more market share.

Q: But are different stakeholders looking at this issue differently because for instance private equity has their own expectations, minority shareholder really does not have very much of a say - where the company is being run at this point in time, we do not have an activist shareholder attitude in this country; are different stakeholders looking at this issue differently?

Sunil Mittal: No I think at the end of the day what is corporate governance? Corporate governance is a mechanism by way of which the company is run to the highest standards of all parameters and that should take care of everybody - big stakeholders and medium stakeholders, private equity, banks and small shareholders as well because once you have aligned yourself to that mechanism, you have no choice but to address all the constituents. I would not say only shareholders - stakeholders, the community of suppliers to you, your customers, your own employees so I would say there cannot be a distinction if you run a company with highest corporate governance, why it could be any different for a large shareholder versus a small shareholder?

Q: The approach really in corporate India and in the rest of the world because of the pressures of quarterly results is short-term - is corporate governance also being looked at from a short-term wealth maximization point of view or do we really have a long-term vision as far as corporate India and corporate governance go?

KV Kamath: First of all, I agree entirely with what Sunil Mittal has said. If I agree with what he has said, then you have to look at a long-term view. Otherwise you are not going to do justice to one, a part of your constituency or the other. So if you have to be fair to all the constituents, then you need to look at it in a longer perspective. It would mean that sometimes your quarter may come under pressure. I think that is a conscious decision that board takes and then implement in the larger interest of all stakeholders.

Q: You have probably a different perspective on a different point of view but to start with is corporate India merely aligning itself with a regulatory framework or has it really imbibed and inculcated the very essence of corporate governance, is it merely from a regulatory compliance point of view or has it actually gone beyond that?

JJ Irani: I think in any environment, you have a spectrum of companies. So you cannot generalize so easily. But I think by and large a large number of our more prominent corporates have imbibed in corporate governance in the true sense of the word and certainly on the boards where I have been, the pressure of quarterly results does not divert us from our long-term thinking.

In my opinion, giving quarterly results is sometimes unfortunate. Annual results were okay, half yearly results were fine, but quarterly results sometimes do put unnecessary pressure.

Q: You have been studying this subject for very long, there have been several reports that have come out on the empirical evidence that connects profitability to good corporate governance - can you shed some light on that and what sort of data maybe that you came up with?

JJ Irani: I think the simple way of defining it would be that you have got to play the game of business according to rules even if sometimes your competitors do not and the environment apparently does not allow you to do, you have got to stick to the chosen past so to speak.

And I can give you many examples where a decision taken today in the interest of corporate governance may not give you an immediate return in this quarter or in the next quarter or even next year. But over a period of time, it will turn out to be the right decision. That means something that you have done in line with corporate governance ultimately turns out to be the right thing for the corporate and for the shareholders and for the community.

In the stakeholder community, we certainly where I come from, pay a lot of attention to the community in which we reside and a lot of our corporate governance is in line with what impact it will have on the community and if we serve the community, it might look as an expense in the short-term but in the long-term it turns out to be an investment.

Q: How do we set benchmark as far as corporate governance is concerned because we have now started experimenting with things like an IPO rating for instance there has been a work done by CRISIL when it talks about corporate governance ratings, where do we set a benchmark how do we create these benchmarks and standards?

Sunil Mittal: Firstly, there is great deal of support available from the international agencies across the globe. There are companies which are known for the corporate governance practices. So we do not have to invent everything. At the same time Sebi has set out a formulation, which to my mind is leading edge. Some of our companies are not only following that and probably going beyond that - can take the case of Mr Damodaran statement the other day there he said, �It maybe a good idea to have a body of independent directors meet separately outside the board meeting.�

Bharti Airtel has been following this for over three years now; there is an independent Director�s meeting, there is a Lead Director meets one hour before the board, formulate some of the issues they want to challenge their management on and it is there. So where do we pick this up from? Tthis is a great practice in some of the leading international companies. So I would say that one is Clause 49, enough material is there just to follow and keep yourself above the water and then look at some leading international practices and follow them.

Q: Your thoughts on that, do we actually need maybe a rating agency sort of system to come into play here?

KV Kamath: I think it is really to come from within to start with. And I endorse what Sunil Mittal said because that is exactly what we have been doing for the same period of time. The independent Board meets one hour ahead and then has a very clearly thought out agenda is to what is it that they would like to talk with the executive board. I think these are good practices and if you actually start change from within, then the need for external ratings is only by the way. And I think that is the stage that we should reach to. Otherwise it becomes a policing exercise and with policing, you can only get this far and not to the end goal.

Q: How critical really is good corporate governance to investor confidence because if the company is actually delivering returns it may not have corporate governance practices in place, but if its delivering returns does it really impact investors decisions?

Mittal: I would be glad to answer yes. But even I get surprised that there are companies who get great deal of investor attention and great deal of investments all the time, yet may not get higher rating in Crisil for example. Having said that, on a long-term sustainable basis there is nothing like sleeping well, and you can only do it if you have great corporate governance norms.

When we were even a very small company we used to pride ourselves in this piece right whether we were listed or for a period of time or not listed; this was something, which was important to us because our strategy was always to have foreign partners. We were clear that if the foreign partners came and walked the corridors of our company, they should say �Wow!� and we have got that �Wow!� every time somebody came to us.

Q: How closely to investors actually look at good corporate governance practices that a company follows?

Kamath: It is not they go out and say I am going to benchmark this on a corporate governance standard.

But what happens is that internal benchmarks come to surface for eg Indian industry which came to turmoil in the 90�s, post 2002 and it reinvented itself; suddenly started taking about quality although nobody told them to talk about quality. When I say talking about quality I mean the internal quality into their process and this became the mantra and they started striving for the Deming Award etc. So these are the sort of steps in the quality context and these are same sort of steps that you take in a governance context.

All of them put together is what is what the public sees and ultimately they see value creation which is sustained and keeps on occurring QoQ and at that point of time there is buy in; there maybe flukes which get attention from investor and money at a particular point in time but that won�t be a long run sustainable strategy.

Q: What about wealth distribution by way of corporate governance because that is an area that is important to all stakeholders as we have been discussing, and how critical is that and how critical is corporate India actually looking at that?

Irani: I think the long-term interest for the companies are best served if the wealth is properly distributed. We have motto in our organizations that � what comes from the people goes back to the people, hopefully multiplies several times more� and therefore you will not find any individual wealth being created in our organizations, but plenty of wealth which belongs to trusts and so on.

It is definitely a long-term investment to ensure that the wealth, which is created, is distributed through educational, medical, cultural; whatever other institutions to the whole country.

Q: Do you see a direct relation between a stock price movement and corporate governance because everybody is looking at ticker at this point and especially when the markets are at these levels? Do you even consider it?

Kamath: looking at that I am saying it�s a correlation of the wrong. You have to look at the history and try to project into he future. I would think sustainability is the key here and only then you will really understand what is happening. In a sustainable way, have you tried to transform the company that you are looking at and then is it showing sustainable, and that is something, which would decide whether it is something, which is correlated, or a flash in the pan?

Q: How different is it for the small medium enterprises and especially for the unlisted companies?

Irani: In our group, there are more unlisted companies than listed ones. But we have made an absolute rule that even the unlisted companies have to follow exactly the same norms because one day, they may get listed and its happening as well. So whether it is the Independent Chairman and the Chief Executive or the number of Independent Directors, whatever applies under Sebi guidelines to listed companies, we make it almost mandatory to our unlisted companies also.

So it is exactly the same ethos that prevails through all the groups. We always look upon our dealings in the form of partnership. It is not �us� versus �them�, its always �we� whether we are dealing with workers or with the government as far as our dues are concerned or with the community because we want to see the community prosper as well, or suppliers or customers. So it�s always a team approach and not that one side wins and the other side loses. We either win or lose together.

Q: Are we actually confirming with compliance or are we actually ensuring delivery?

Irani: Depends on the board. I think what we have tired to put into our amended law is to give the independent directors also some teeth, that if they find that we are just complying in form, then they can take certain actions to ensure that the company complies in substance also and does not become a box sticking exercises.

Q: How do you hold a company that doesn�t deliver on corporate governance norms accountable? How do you actually see this company being brought back on track?

Mittal: I think it really depends, if you have a promoter run company where somebody has 75% of stake, it�s very hard to do very much if the person doesn�t want to change. Even if it is 51% or 40%, with very small shareholder it is very hard to change.

In the companies which will have massive public holdings, take the case of ITC, there�s a large public holding and a government institutional holding. You could bring in pressure if a company of that share holding type was to be corrected. If there are other companies which have even more diluted public shareholding, one could pressure like one sees in US or Europe now.

Q: How do you make this whole shareholder activism business more robust in this country, because it has completely evaded us?

Mittal: No, I won�t agree. In fact, in the last four or five years, a lot of effort has gone into this area. Listed companies, in any case, have to comply a lot with what has been put as Clause 49. More importantly, people are suffering in wealth creation.

You do get extra 4 or 5 X of a company which has great corporate governance. I think it got very highly demonstrated through Infosys and so now, dozens of other companies like Bharti, ICICI and Tata�s of course have been doing it for a long time.

Q: Mr Irani spoke about a common sense approach to corporate governance. Is that an Indian approach to corporate governance in that sense?

Kamath: I think the Indian approach is also in an evolutionary stage. If one looks back ten years, we were in the lending business and we knew our clients in those times. If one looks at clients today, we are seeing a completely different mindset in terms of how they approach.

I think an Indian mindset which is that of a private company behaving in a particular way, even though it got listed it still behaved in that way, that mindset has now started dropping very clearly. This is because the entrepreneur understands the rewards of being clean and running a business in a manner which is transparent.

I guess that today, the demonstration effect is very strong and that is acknowledged by business leaders.

Q: Has the mindset within family businesses really changed?

Irani: I don�t think I�m the appropriate person to comment on that, but if you are referring to Tata�s, then it is not a family business.

Q: No, I am not referring to the Tata�s. I am basically saying that the family run businesses. As Mr Mittal was pointing out, the perception is that promoter group decides where, how, when and pretty much decides it all?

Irani: One needs to remember that the minority shareholder certainly has rights, but so does the majority.

Q: Are they allowed the flexibility of exercising those rights?

Irani: Through the independent directors, yes. But ultimately, the majority shareholder must also have some rights because the majority of the money is his.

Kamath: The question is, are private companies, family owned companies changing, and is there a change that�s visible? Just look at the CNBC and ICICI Bank SME Awards of the year, three years back 5,000 companies stood up and said count us in. That took a lot of boldness to give their numbers to an independent rating agency to evaluate and then, come with a short list and be judged.

Last year, just in three years, and number has gone to 1,25,000 companies saying �I want to be counted across 10 verticals and am I the best?� I think when you start talking to them, and every year I have taken the opportunity to talk to these companies, they are talking the same language that the three of us here are talking. They are talking the same language in terms of the governance and wanting to be the best. They may be small, but they are thinking big. That to me is true change.

Q: What to your mind are the priorities to keep that momentum going?

Mittal: I think a lot of government initiatives in these area. Just go back seven-eight or maybe nine years, the salary I could draw as the wholetime director of my company was Rs 5,000, probably Rs 2,500. Imagine now, a plethora of promoters who are allowed only to pick up Rs 5,000 as salary, what happens to the company�s position in terms of managing cash, managing families aspirations. It�s gone now.

Today you can write Rs 5 crore-Rs 10 crore cheque to yourself in a company. I think that was a good decision for the government to unshackle this particular area.

I think many initiatives like this, which have been put into play now allow people to play a fair game.

Kamath: I would think what�s critical at this point in time is to ensure that it doesn�t get to be a bureaucratic exercise which controls your entrepreneurial spirit. There�s regulation and the whole move on the governance, besides that, you are able to act as an entrepreneur. But with the right checks and balances which lets say at the board level, the independent directors or whoever is running that organization bring, then that is answerable to the largest shareholders and by default, to the larger stakeholders. I think it�s on it�s way and we have to be cautious of not getting into an over-regulatory situation.

Q: A lot has been implemented but to your mind, what is really left at this point in time that you think will make a big difference?

Irani: The bottomline is that one cannot mandate corporate governance. The stricter one makes the laws, the more loopholes people will try and find. So you cannot mandate. You have to facilitate. I think what the government has done up to now is more along the right lines.

There are some restrictions, for example, the fees for directors attending a board meeting are even now fixed up to a certain maximum. There is no need for that to be there. I think it should certainly be seen that those who break certain principles or rules should be taken to task. In India we have no shortage of good laws, the shortage is really in implementing.

Well, the message is loud and clear. There�s really no need to mandate corporate governance, the need is to encourage or facilitate it. But there must be examples that should be held up of poor corporate governance practices just as there should be examples held up of good corporate governance practices.