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This piece has been authored by Ms. Saru Sharma, a first year student of B.A.LL.B(Hons.) at the Rajiv Gandhi National University of Law, Punjab.
Introduction
India, in the recent years, has witnessed manifold instances of weak governance, fraud and chronic capitalism. This has not only led to the demise of many large-listed companies but has also led to the emergence of a growing concern around corporate governance in various corporations, agencies and firms in the country. A Punjab and Maharashtra Co-operative Limited bank that went down earlier this year, is proof that regulated companies can both suffer and be a trigger for fraud. To say the least, as trends go, matters that are categorized under the general umbrella of “corporate governance" are only set to take up greater mind space among CEOs and boards in the coming years. These include issues about the wholesomeness of board and committee composition, disclosure standards, succession planning, executive compensation, stakeholder engagement, board effectiveness and evaluation, risk management and strategy for environmental, social and corporate governance (ESG). [i]
Corporate Governance: What Is It?
At this crucial juncture, the need for discussion and awareness creation about corporate governance seems more important than ever before. The term corporate governance refers to the act of managing an entity.[ii] Corporate Governance (CG) may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled.[iii] According to the Securities and Exchange Board of India (SEBI), “the objective of Good Corporate Governance is to increase the long term value of the company for its shareholders and all other interested partners”. [iv] The norms for the same are set out in the Companies Act, Clause 49, the listing agreement that companies sign with the stock exchanges and in SEBI’s new Listing Obligations and Disclosure Requirement Regulations of 2015.[v]
Contemporary Challenges to Corporate Governance : An Apt Example - The Leadership Crisis in Infosys
The corporate battle of big business houses in India have triggered the need for transparency in safeguarding the interest of employees, stakeholders and minority shareholders. Infosys, which has been suffering with a leadership crisis for almost a decade now, seems to be just the apt case in point of this. Co-founded and established in 1981 by Narayan Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora, Infosys was once seen as a company that prided itself for its high standards for CG. It was even adjudged as the best company for corporate governance in 2010 by Asiamoney. But the bellwether company which was once a story of entrepreneurial agility and integrity as India moved from license-control Raj to liberalization.[vi]
The recent allegations by a whistleblower who claims to be an employee of the company’s Finance Department has alleged the top officials of indulging in unethical practices and the CEO of the company, Salil Parikh for certain misdeeds. They also alleged the involvement of CFO, Nilanjan Roy in ‘unethical practices’ for boosting short-term profits. The complaint was addressed to the Chairman, independent directors and the shareholders. This is not the first such a complaint has surfaced in the public domain. Not long ago, in 2017, CEO Vishal Sikka was accused of similar practices due to which he had to resign. This incident raises two main concerns. First, that corporations and people in power, in the name of profit might exceed their given powers and exploit those who don’t have a voice. And second, that this implies a lack of governance in Indian firms and companies today.
What must be done ?
The plethora of cases that we have been witnessing for quite some time now, especially the ones where stocks were hammered in a short period of time, all indicate an alarming state of affairs. Both, the large global conglomerates like Infosys, YES Bank and ICICI (which faced serious allegations regarding unethical practices used by the companies against stakeholders’ interest) And the small companies like PC Jewellers and Infibeam (who were accused of making opaque deals and group transactions with limited disclosure) have been hit by it.[vii] This menace of weak corporate structure is consuming everyone under it. As a measure, SEBI had constituted a committee on corporate governance under the chairmanship of Uday Kotak in June 2017.[viii] The committee was expected to submit its report within four months. Market participants said that the Infosys issue too should be considered in detail by the committee.[ix] Almost 40 out of 80 recommendations made by this committee were recently accepted, these recommendations broadly deal with separation of roles of chairman and MD & CEO, mandatory disclosures, augmenting board strength and diversity regulating number of directorships.
Some other critical issues that must be brought under the light at this point, include questions like: Is the board performing in the larger interests of the shareholders? Does the company have adequate risk management systems in place? For example, in case of Infosys, not a single red flag was raised by any board member.[x] In order to ensure good corporate governance, Firstly, it must be made sure that people at significant positions in companies don’t stay for too long or get too comfortable in them so as to avoid situations where any of them indulges in unethical practices. A lesson could be learnt from the western countries like Italy, United Kingdom and Finland etc. whose stringent laws ensure the same, in fact the world average for tenure of CEOs is 4 years[xi]. Secondly, while whistleblowing is an important tool for monitoring corporate social responsibility, it is imperative for the company to build trust among its employees. Not all whistleblowing acts are genuine, a study conducted recently states that more than 60% of them are frivolous. SEBI recently announced a reward for up to 1 cr for corporate whistleblowing.[xii] Though a good step, but it must not be considered enough. The need of giving confidence regarding the protection of identity of the whistleblower is equally vital.
Currently, even though the country has many regulations in place, they are still not properly implemented, the fact that Infosys whistleblower complaint was reported to the public 21 days after it was made is a clear proof of that. Another example of it could be the need of better implementation of provisions for minority shareholder rights. Thirdly, carrying out of independent investigations by the concerned agencies is another salient concern. It would help, keeping at arm’s length, crisis like that of Infrastructure Leasing & Financial Services (IF&LS) created due to substandard audit reports.
Conclusion
The Infosys fiasco has essential lessons in corporate governance for all of us. There was a time when the same company was known for its high standards in good governance, setting an example for the rest of the world. However, when promoters mix-up their roles as executives, shareholders and board of directors, then such problems are bound to rise. The concern of shareholders over the huge severance pay to ex-CFO Rajeev Bansal, huge pay hikes to then CEO Dr. Vishal Sikka, along with Panaya deal and appointment of Punita Kumar Sinha as a director or the latest allegations of financial mismanagement by the company CEO and CFO are all examples of it.[xiii]. A company which has good corporate governance has a much higher level of confidence amongst the shareholders associated with that company. In case of Infosys, it has witnessed a steep fall in its share prices of and favor of the shareholders and stakeholders in it. It must act as a reminder of how whistleblower allegations, which may or may not be true, can harm a company’s reputation. Hence, for the company itself to to win the trust of its founders and other stakeholders, it must first stabilize the standards of its Corporate Governance practices.
All of this makes one thing very clear, and that is that transparency and accountability is the key to corporate governance. While instilling a culture of cut throat competition and large targets, the company culture of ethical and just governance must not be compensated. Because you may have no choice in politics. But with companies, you don’t have to wait for five years to speak up on bad governance.[xiv]
End-Notes
[i] Amita Gupta Katragadda, U.K. Sinha, Opinion | The Quiet Transformation of Corporate Governance, Livemint, May 10, 2019, https://www.livemint.com/opinion/columns/the-quiet-transformation-of-corporate-governance-1557392837251.html
[ii] Aarati Krishnan, All you wanted to know about Corporate Governance, The Hindu, August 21, 2017 https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-corporate-governance/article9825427.ece.
[iii] Corporate Governance: concepts and objectives, Bussiness.gov.in,( Last accessed: January 8, 2020) https://archive.india.gov.in/business/corporate_governance/concept_objectivess.php
[iv] Dr. Alka Mittal, An analysis of corporate Governance Imbroglio at Infosys, International Journal of Management Studies, http://www.researchersworld.com/ijms/
[v] Ibid.
[vi] Jagdish Rattwani, A corporate crisis in Infosys again, Deccan Herald, November 12, 2019.
[vii] Corporate Governance in India: What needs to change?, India Infoline News Service, Mumbai, November 30, 2018.
[viii] Report of the Uday Kotak committee on Corporate governance, SEBI, 5th october 2017.
[ix] Oommen A. Ninan, Corporate Governance: Focus on Sebi, The Hindu. August 20, 2017 https://www.thehindu.com/business/Industry/corporate-governance-focus-on-sebi/article19530038.ece
[x] Corporate Governance in India: What needs to change?, India Infoline News Service, Mumbai, November 30, 2018.
[xi] Sachin P. Mampatta, How Long Does an Indian CEO last in a corner office?, Livemint, September 27, 2019, https://www.livemint.com/Companies/Kek9zqK4tT4MVhtFYK957I/How-long-does-an-Indian-CEO-stay-in-the-corner-office.html
[xii] ETmarkets.com, Sebi okays up to 1 cr reward for corporate whistle blowers, Economic Times Markets, August 21, 2019, https://economictimes.indiatimes.com/markets/stocks/news/sebi-okays-up-to-rs-1-cr-reward-for-corporate-whistle-blowers/articleshow/70771483.cms?from=mdr
[xiii] Dr. Alka Mittal, An analysis of corporate Governance Imbroglio at Infosys, International Journal of Management Studies, http://www.researchersworld.com/ijms/ .
[xiv] Aarati Krishnan, All you wanted to know about Corporate Governance, The Hindu, August 21, 2017 https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-corporate-governance/article9825427.ece .
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