A draft report of the 12-member task force on corporate governance, set up by the Confederation of Indian Industry's national council, under the chairmanship of Rahul Bajaj, past president of the CII and CMD of Bajaj Auto, was released in end-April.

The committee deserves compliments on two grounds. First, instead of importing this new concept verbatim from a "Vilayati" land, the committee has kept in mind our unique business and financial milieu as any attempt to use a "standard package" would only entail putting a square peg in a round hole. Secondly, the committee has submitted its report expeditiously, which is in sharp contrast to government committees, which take years to deliver.The recommendations, based on maximising shareholder value, safeguarding creditors' rights and transparency in disclosures, are pathbreaking. The suggestions define `de-novo' the responsibilities of the board, transparency in disclosure, creditors entitlement to data, and the role of FIs.

One important objective of corporate governance is to make the board more accountable for the firm's performance by defining basic qualifications for the members, and mandatory induction of non-executive directors for listed companies with turnover of Rs 100 crore and above. Restricting an individual as a non-executive director to a maximum of 10 board memberships is praise-worthy. At present directorship is perceived as "ornamental" and in many cases purposeless. The clause that they should be present in at least 50 per cent of the meetings - which should be held once in two months as a full-fledged half-day meeting with detailed agenda - for qualifying for re-election will ensure their active participation.

The panel also suggests setting up of audit committees comprising non-executive directors to verify the firm's records. They would submit their findings on adequate compliance with all parameters of procedures and formalities, and function as a `conduit' between shareholders and the board.The audit committee's role would be similar to that of statutory auditors except that its focus would be on data to be provided for board meetings, AGMs, extent of transparency etc. It would also be required to liaise with both the statutory and internal auditors in carrying out its assignment.The steps would ensure that the non-executive directors devote much more time to the operations of the company in contrast to their earlier `ritual' role as an occasional visitor to the board room. The committee has recommended a hike in the sitting fees, in addition to being eligible for commission and stock options.

One result may be that non-executive directors now on multiple boards may become choosy. Medium-sized firms, and those which do not perform excellently will get "residual" treatment. Like "A" or "B" group shares, there will be corresponding sets of non-executive directors. Companies will vie for the better ones.

The other important recommendation of the Committee is disclosure on a "leaving no-stone untouched" basis. The list of agenda and information to be provided at board meetings and AGMs is exhaustive. Apart from the financial data, and business plan, notable information to be disclosed are: provision of a separate statement giving fund-utilisation details where equity has been raised; details of loans provided to the directors, their remuneration packages, appointment of sole selling agents (where one or more directors have an interest), the monthly share price movements etc.

In relation to creditors, apart from financial data, credit ratings from rating agencies, and non-permission for issue of credit documents (debentures, FDs, etc) where the company has defaulted on repayment of debt/interest warrants etc. deserve applause.

The recommendation that nominee directors need not be "planted" in companies which have not defaulted their commitments is a debatable issue. Some say that since FIs have significant stake in many private sector companies, it is essential that they should have representatives on the boards to function as a "watchdog".The performance of these FIs depends primarily on corporate results. Since shares of many FIs are listed, they are accountable to the public at large. Logically, then, the nominee directors actually represent ordinary shareholders, and their presence is required.

Some issues require address. The committee recommends that a certificate needs to be issued by the CEO or CFO of the company stating that the company has complied with all governance formalities. This needs debate. Since both the CEO and the CFO are employees, they tend to make marginal compromises in a "chalta hai" regime, and may lead to a "rubber stamp" situation in the long run.

Considering its importance, it is more appropriate that an external agency, say a firm of chartered accountants, issues this certificate. Otherwise, the certificate may be signed by the audit committee who are "au fait" of all the rules of the game. Also, in case there is any issue of non-compliance or financial misappropriation at a later stage, then the audit committee should be pulled up.

One wonders whether vital information may be lost in the exhaustive disclosures. Also, given the importance of this concept, it could be considered as a part of the Companies Act, and anomalies, if any, could be removed in the latter.

While transparency is the lynchpin of corporate governance, one could use a "contextual filter" for provision of data in the annual report. What is the purpose of giving salary details of a mere matriculate stores clerk of more than 30 years' standing in an annual report just because his salary exceeds a particular level? Instead of following a procrustean attitude of using stringent methods for the sake of uniformity, one should judge from a "realistic" point of view. Perhaps one could think in terms of providing the salary details of all departmental heads or for a particular level, say that of the general manager and above, irrespective of their salary package. The recommendations of the committee that all salary details are to be submitted only to the registrar of companies, and not form part of the annual report does not seem to be appropriate.

Similarly, if a company has clearly delineated divisions operating as separate "entities", then the P&L and balance sheet of these divisions may be appended as a part of the mother company's annual report. The external agencies want to know which of the divisions in the company are doing well. Also, in case any division is spun off as a separate company or is being sold to another group or company, then this will enable the shareholders to arrive at a decision. One could also think in terms of indicating the market share of the company/division in the annual report (as compared to the previous year). Usually this data is available.

The final report should also incorporate certain new responsibilities for companies towards the environment, social upliftment (possibly through allocation of a percentage of net income), and employee-related welfare schemes.

These will imply "qualitative change" in the operations of the company. What is necessary is that this should not stop at the top, and should percolate down the line to the lowest level in the organisation.

Also, the attitude and work culture of the top management should be perceived as an example for the lower level to emulate.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.