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Issues of corporate governance

10. Effectiveness of company’s system of internal control:

If the company is to be healthy and should continue to be so, the Board of Directors should ensure setting in place procedures, which will provide adequacy of the system of internal financial and other controls. A balance sheet is only a financial snapshot of the company at a point of time. The figure will be a different the next day, and could be very different indeed within a few weeks or months. An income statement, or profit and loss account, is only a report of the results of the period transactions, policies, about how and when assets and liabilities should be showing how the companies cash requirement have met, and what has been done with any surplus leftover. None of these three statements claims to offer any information on the liability of the Company to respond to change, not as to the effectiveness or otherwise of the Company’s control over its finances. The clear framework of responsibilities at various levels will assist in developing internal control systems. Continuous monitoring whether such responsibilities are being fulfilled by all concerned is a task by itself. However, since this is a prerequisite for the effective internal controls, there is no choice but to adhere to it. A dialogue between various levels of operating Management is a practical solution to the effective internal control, since implementation of the required systems needs cooperation. At all levels.

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11. Innovation:

The futuristic Corporate Governance is necessarily interlinked with innovation. Many of the companies, which are well known for good Corporate Governance practices, have a strong research and development wing in the organization and there are companies, which spent five to ten percent of their revenue on research and development. Although innovation is expected from the research and development department of a company, the built-in culture of some of the companies like Infosys have innovation itself built in there. In one the recent interviews Mr. N. R. Narayana Murthy, mentor and Chairman of Infosys, mentioned that the customers, investors, society, bankers, government and also employees have respected Infosys because it follows excellent Corporate Governance practices. He further added that he is not a great believer in the top line but he is a great believer in the bottom line. He is also a great believer in margins since it is the true index of a good Company. He also said that his Company could improve on the margins because of strong innovation efforts put in by software engineering technology (SET) laboratory on 25 new areas within telecom, web services and others. His people have been using R and D outputs for enhancing value for the customer.

It may not be out of place to mention here that some of the most successful companies today have adopted six sigma as a means to achieve. The end providing a value preposition that encompasses superior quality and competitive pricing. It has two major thrusts – one that is directed towards significant innovation or improvement of an existing product, process or service that uses an approach called DMAIC (define measure-analyse-improve-control) and a second one that centers on a product, system or service design called DFSS (design for six sigma). Six Sigma integrates various strategies and tools from statistics, quality, Business and engineering with the adoption of new ones likely as its use expands to more business sectors and areas of application.

12. Current trends and Corporate Governance:

The significance of Corporate Governance principles and practices is getting more and more focused over the years and it is worthwhile to view it in terms of the current global developments. Companies and their Board of Directors need to understand the implications of these trends alongside needs of all stakeholders in proper perspective Vis-a-vis competitive developments. Following are some of the current important trends: 1) As a consequence of economic liberalization, technological advances, capital market developments and demographic shifts, the world has embarked on a massive realignment of economic activity.

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2) Due to unprecedented aging of populations across the developed world, many emerging market governments will have to provide higher level of social services and health care and retirement security, in both the developed and developing worlds.

3) Almost a billion new consumers will enter the global market place in the next decade. Consumers will have changing trends and preferences since they will increasingly have information and access to different products and brands.

4) Technological connectivity will transform the way people live and interact due to the technological revolution.

5) The shift to knowledge-intensive industries highlights the importance and scarcity of well-trained talents. For many companies and governments, global labour and talents strategies will become as important as global sourcing and manufacturing strategies.

6) The role and behavior of big Business will come under increasingly sharp scrutiny. Business leaders need to argue and demonstrate more forcefully the intellectual, social, and economic case for the business in society and the massive contribution business makes to social welfare.

7) Demand for natural resources will grow, as will the strain on the environment. Innovation in technology, regulation, and the use of resources will be central to creating a world that can both drive robust economic growth and sustain environmental demands.

8) In response to changing market Regulation and the advent of new technologies, nontraditional business models gre flourishing, often coexisting in the same market and sector space. Corporate borders are becoming blurrier as interlinked “ecosystem” of suppliers, producers, and customers emerge.

9) Management will go from art to science. Improved technology and statistical control tools have given rise to new Management approaches that make even mega- institutions viable.

10) New models of knowledge productions, access, distribution and ownership are emerging.

13. Public sector undertakings and Corporate Governance:

Clause 49 of the listing agreement applies to all listed companies in accordance with the schedule of implementation pursuant to the relevant SEBI circulars issued from time to time. The recent developments at the Center however indicate that the Corporate Governance norms are being evolved in such a fashion that professionalism in the Governance would be infused in public sector undertakings and that all special as well as restrictive treatments given to the public sector undertakings may be done away with. The ministry of Company affairs, the department of economic affairs and the department of public sectors enterprises are about to ask the World Bank to study the running of PSU’s here and make suitable recommendations. World Bank Is the Company affairs ministry’s partner in Corporate Governance matters. Besides red tapism and bureaucratic control over decision-making, the proposed norms would also address the government’s grip on the pricing of PSU products. A sector where this would have significant implications is the oil sector. It would also address the misuse of a Company’s assets by public servants. Public sector companies now enjoy many privileges as well as suffer several restrictions and are subjected to differential treatment in many areas. Government guarantees for bank loans at softer interest rates and public funds to salvage sinking companies are just two of the privileges they get. The differential treatment comes in a variety of ways. The cabinet secretary should resolve not by litigation, as in the case of private sector firms, but by arbitration disputes between two PSUs. Audit of accounts by the comptroller & auditor-general of India is another example. In addition, the exercise would look into the need for a uniform legal framework for incorporation of all public sector companies. Now, some of them are corporations, some are boards and some are just an extension of the ministry such as the central government health services. The proposed norms would be on the lines of the organization for Economic cooperation and development’s (OECD) globally recognized Corporate Governance principles for state-owned enterprises. This covers key areas such as the state’s role in the functioning of the Company, equitable treatment of all shareholders, transparency and disclosure and responsibilities of the board.

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14. Confidentiaiity and Corporate Governance:

It is now very much accepted phenomenon that transparency is one of the accepted practices of Corporate Governance. The more the practices are transparent there is less chances to doing wrong because there is always a fear of being caught. So managers and others are kept accountable and checked at various level for the steps they take.

15. Coaching of CEOs:

A competitive global economy has forced the Corporates to make their CEOs to learn updating their skills and knowledge and for that purpose to undergo training. Proper coaching of these CEOs hone their interpersonal skills as well as techno commercial knowledge.

Keeping pace with global trends, companies like Cadbury, HLL, Wartsila, Godrej, and Marico, among others, are hiring CEO or Executive coaches. Interestingly, even the heads of several small and medium enterprises (SMEs) have begun hiring coaches to groom them in a competitive world. Executive coaching, as a specialized discipline, has been flourishing in the US and the UK for over 20 years. As a part of good Corporate Governance practice, several Indian corporates who had earlier been reluctant to take to coaching on the assumption that it would be viewed as an admission of Management weakness are now open to the idea. Several family-run businesses are hiring professional coaches to break self-imposed boundaries and strengthen developmental attributes and hence, performance. The coach’s arena is to study interpersonal relations, office politics, corporate culture and counsel CEOs and senior functional managers to wield their power more effectively. “Coaching provides objective feedback from someone who has no personal or hidden agenda”,” said the CEO of a top consumer goods company on condition of anonymity. Another Chairman and owner of a large conglomerate, managing diverse Businesses in trying to get coached on how he can get the organization deliver with speed. The head of another leading company wants to get better at how to keep his team and Company ahead of the pack. Yet another hands-on CEO wants to empower his people and let them feel at charge – so that they don’t look up to him for direction all the time.

16. lntellectual Transformation Needed For Corporate Managers:

Corporate Governance against the backdrop of globalization has become a delicate and more onerous task for survival as well as for seizing the opportunities. In the context of the legal and judicial framework and the attendant problems and difficulties, it is necessary for corporate managers to undergo unprecedented intellectual transformation. “Go Slow to go fast” is an aphorism that threatens to cripple progress. Towards intellectual transformation it will be profitable to keep in mind the prescriptions of Professor C. K. Pralhad. Globalising Management, published by John Willey & Sons, Inc. He says all firms and managers will be forced to re-examine their approaches to Management, audit the skill base, recalibrate their performance and learn new behavior.

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Managers must:1) Develop an ability to conceive of & execute complex strategies 2) Cope with decreasing degrees of strategic freedom 3) Protect and nurture invisible assets-intellectual property, commitment relationship with host government, etc. 4) Cope with an increasingly complex interface between public and private policy 5) Integrate totally new technologies – learn to operate outside their comfort zone 6) Provide administrative and intellectual leadership 7) Become fast and flexible without losing clarity and consistency to direction.

17. Influence of NGOs and Corporate Governance:

The recent development In the corporate sector which may create concern for the promoters of big companies is that, young and middle-aged professionals in the corporate sector have started quitting their high paying jobs and joining NGOs. This is a trend that has caught on in a big way in the past three to four years. In fact the percentage of people switching over to the social sector has doubled to three percent in the past years (i.e 2005). The reasons for this are varied, ranging from job satisfaction to fulfilling life style. Working in the social sector needs personal motivation. Compensation is no consideration. What is needed is passion to work for a social purpose. For senior managerial persons, switching over from the private sector to a social sector has different consequences. One sector’s loss is another sector’s gain. This development has positive social consequences. However from the point of view of Corporate Governance, directors and managers who have been contributing so well to the organization, may create a void after their departure and for such eventuality, succession planning is an answer.

18. Necessity of Judicial Reforms:

Our judicial systems, though having performed a salutary role during all these years, certainly are becoming obsolete and out-dated in many years. The delays taking place at all levels have been due to the lawyers and others with vested interests. One does not know how efficiently the existing legal system can cope up with the new demands of changed period. We see more and more misuse of systems by the affluent and powerful, which includes corporations. The judiciary certainly on a large number of occasions have stood by the common man and played the role of his protector but it has also proved ineffective in time providing necessary relief and remedies. The judiciary will also have to notice the changed requirement, new international environment and aspiration of the people at large to integrate with the main stream of international trade and many have to chart new course in a number of areas. One more important development would be having a built-in system to ensure that corporates are more transparent while accepting fixed deposits. This would ensure safety and liquidity in the case of people who deposit their savings with public companies for a higher interest rate, but get only limited protection. The law would make it mandatory for public companies to declare the end use of the funds they are soliciting. Right now, a public company accepting deposits under the companies (Acceptance of Deposits) Rules, 1975, is not needed to declare the end use of funds under SEBI norms.

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