CHANGING BUSINESS SCENARIO AND CORPORATE GOVERNANCE ARCHANA KAUL* INTRODUCTION The rapid scientific technological advancements are

reshaping the world. Developments in information and communication technology have revolutioni ed every activity! "e it scientific or "usiness and commerce or individual and personal. #or "usiness and commerce! they have facilitated improvements in productivity and "ottomline of the "usiness and commerce "esides opportunities for "etter customer service. The productivity improvements come out of the increased speed! accuracy and a"ility to handle "ig volumes that technology offers. #or the financial sector and "an$ing! the developments in information technology have spelt very special "enefits. In today%s glo"ally competitive mar$et! $nowledge constantly ma$es itself o"solete with the result that today%s advanced $nowledge is tomorrow%s ignorance. One has to "e on the learning curve and continuously move up. &ll the $nowledge wor$ers have to leverage intellectual capital for growth'creative destruction'$eep on innovating' otherwise someone else will "e at the top of the pec$ing order. Companies function in a world of e(ponentially shortening product and service life cycles where customer preferences and technologies change in a discontinuous and non)linear fashion and "usiness paradigms and rules "ecome o"solete. The future winners will "e those "usiness organisations who escape from the gravitational pull of the past on the fuel of innovation. In the opinion of some e(perts the twenty first century competition is characteri ed "y at least three fundamental paradigms shifts! vi . ) *a+ &"ility of organisations and individuals to networ$ glo"ally and seamlessly, *"+ &"ility to communicate! transmit! store and retrieve large amounts to information including voice! data! video, and *c+ -o"ility of capital to feed good pro.ects around the world. /ith the "attle for mar$et share and mind)share deepening! companies are increasingly resorting to non)traditional resources *li$e $nowledge+ and innovative means *li$e 0uic$ response+ to create sustaina"le competitive advantage. /12 COR3OR&T4 5O64RN&NC47 #rom the "eginning corporate governance has ac0uired connotation of policing the thieves. -a.or reason for 8confrontationist% undertone is that managers remain unconvinced that corporate governance is a powerful tool for transparent! prudent and participative management that could "e fair to all sta$eholders and still enhance value of an enterprise as well as reward them commensurate with performance. Conse0uently! several managers o"serve corporate governance "ecause it would "e difficult to openly o".ect accounta"ility to shareholders! who have ris$ed their capital and responsi"ility to other sta$eholders! whose livelihood depends upon prudent management. Nor can they "e seen to grudge the right of sta$eholders to get a true picture of "usiness performance and style of management. 3erhaps failure in accepting whole) heartedly the spirit of corporate governance is on account of fear of dilution of authority rather than with any predetermined plan for wrongdoing. Realising this inner dilemma of managers and reposing faith in them! the Cad"ury Committee! while highlighting unfair managerial practices! opted for voluntary compliance and designed a normative code of conduct. If corporate governance has assumed negative connotation! it is largely due to helplessness on the part of shareholders to deal with corrupt and incompetent managers. Ironically! competitive "usiness
* Education Officer, The ICSI. The views expressed are personal views of the author and do not necessarily reflect those of the Institute.

environment is "ringing the "est out of managers as a class. Corporate governance has "ecome a contentions issue "ecause while empowering "oards and shareholders to deal with incompetent and corrupt managers is a relatively easy matter! dealing with "rutal violation of spirit of corporate governance "y 8e(cellent managers! who have created great shareholder value! is one the "iggest challenges. In the conte(t of fast changing corporate and socio)economic landscapes! fast paced technology and emergence of multilateral trading system! the following factors underscore the need for good corporate governance 9 *i+ 5lo"alisation! privatisation! deregulation! causing revolution of rising e(pectations, *ii+ &dvancements in Information Technology and 4)Commerce. *iii+ :trategic alliances! mergers and ac0uisitions. *iv+ Intellectual 3roperty Rights. *v+ :ocial responsi"ility! social audit and societal concerns. *vi+ ;usiness and professional ethics. *vii+ :ustaina"le development. *viii+ 4nergy audit! environmental upgradation. *i(+ Need for e(cellence to cope up with fierce international competition. *(+ Need to stri$e a "alance "etween compliance with rules and company%s need to perform! so that company%s performance is not stifled "y over regulation. D464<O3-4NT: IN ;U:IN4:: :C4N&RIO 5ood governance is a necessary condition for achieving e(cellence! not a sufficient one. 5ood governance is a source of competitive advantage and critical to economic progress. :ome of the developments which have considera"ly changed the "usiness scenario in our country which necessitated new approach to governance are 9 *a+ The New 4conomic 3olicy *N43+ of =>>=! announced "y the 5overnment of India. This is a landmar$ year in the sphere of economic li"erali ation and trade related reforms. & num"er of innovative changes have ta$en place in the "usiness environment. -a.or areas of reforms related to a"olition of industrial licensing system e(cept for a short list! opening up of Indian economy to foreign investment! li"erlisation of norms for foreign technology transfer! a"olition of Chapter III of the -RT3 &ct relating to concentration of economic power! intention of the 5overnment to adopt a new approach to 3u"lic :ector Underta$ings including disinvestments etc. /ith these policy re)orientation! the role of the 5overnment! as the regulator has changed from e(ercising control to one of providing help and guidance "y ma$ing essential procedures fully transparent and eliminating delays. *"+ :implification and raitonalisation of "oth direct and indirect ta( laws including lowering of tariff "arriers and removal of 0uantitative restrictions. *c+ &"olition of the office of the Controller of Capital Issues and the setting up of :ecurities and 4(change ;oard of India *:4;I+! as an autonomous "ody to promote! regulate and develop the capital mar$et on healthy lines and protection of investor%s interests in securities. & num"er of Rules and Regulations have "een issued "y :4;I for regulating the activities of intermediaries?others in the capital mar$et.

*d+ Replacement of #oreign 4(change Regulations &ct! =>@A "y #oreign 4(change -anagement &ct! BCCC including introduction of converti"ility of rupees on current account. *e+ <i"erali ation of norms for #oreign Direct Investment *#DI+ in Indian Industries and also portfolio investment norms. *f+ Issue of regulations "y :4;I regarding :4;I *3rohi"ition of Insider Trading+ Regulations! =>>B! :4;I *3rohi"ition of #raudulent and Unfair 3ractices relating to :ecurities -ar$et+ Regulations! =>>D and :4;I *:u"stantial &c0uisition of :hares and Ta$eovers+ Regulations! =>>@ as amended from time to time. *g+ :etting up of /orld Trade Organisation */TO+ as an ape( "ody at the international level! to which India is a signatory! to regulate and develop international trade on healthy lines. *h+ Replacement of -RT3 &ct! =>E> "y Competition &ct of BCCB. The aforesaid changes and policy re)orientation have ushered in a new era of li"erali ed "usiness and legal environment. :elf)regulation of corporate affairs is now the order of the day. &nother development which should not go un)noticed relates to the percepti"le change ta$ing place in India in the profile of corporate ownership! capital mar$et reforms! increasing inflow of foreign capital "oth on account of #oreign Direct Investment *#DI+ and portfolio investment! preferential allotment of shares to the promoters of companies including foreign promoters! the policy of disinvestments "eing hotly pursued "y the 5overnment of India in 3u"lic :ector Underta$ings *3:Us+ F these and other factors are changing the very pattern of corporate ownership. :4;I *:u"stantial &c0uisition of :hares G Ta$eovers+ Regulations! =>>@ as amended from time to time and the permission given to the companies to "uy)"ac$ their shares in the mar$et have also contri"uted to the changing pattern of corporate ownership. 5lo"alisation of Indian economy and su"stantial reduction of tariff "arriers)these are pointers to the changing "usiness environment. These factors have given rise to increasing competition in the mar$et place for the Indian products and services. There is an imperative need to manufacture and mar$et high 0uality products which can withstand the products of foreign manufacturers. The fast changing "usiness environment calls for a new approach to the management of corporate organisations. C1&N54: IN T14 CO-3&NI4: &CT! =>DE 4sta"lishing norms for corporate governance is not a one time affair. It is indeed an evolving e(ercise. Therefore! continuous efforts are re0uired to "e made to effect changes in the applica"le laws so as to improve the standards of corporate governance. <isting agreement was the first document to undergo a change. In this conte(t! it may "e pointed out here that :4;I appointed a committee headed "y Humara -anglam ;irla to suggest measures for evolving new norms of governance for the corporate organisation. The Committee for a good deal of deli"erations recommended certain new norms of governance. :4;I accepted the recommendations of the Committee and directed the :toc$ 4(changes to implement the same through the listing agreement. &t the same time! some changes were introduced in the Companies &ct! =>DE. The Companies *&mendment+ &ct! BCCC which came into force with effect from =A.=B.BCCC "rought on the statute "oo$ the emerging concepts of the &udit Committee and its role! directors responsi"ility statement in the directors report! additional dis0ualifications for directors etc. Introduction of postal "allot for transacting certain items of "usiness in the general meeting was another novel feature of the &mendment &ct. CO-3&NI4: *&-4ND-4NT+ ;I<<! BCCA /ith a view to ensure that the definition of independent director as recommended "y the Naresh Chandra and Narayana -urthy Committees is given legal sanctity! the 5overnment has proposed to incorporate a new provision in the nature of :ection BDB& in the Companies &ct! =>DE. The Companies *&mendment+ ;ill! BCCA *the ;ill+! contains clause ==> that intends to define the term 8independent director%. &lthough in reality! the said clause does not define the

term independent director and instead mentions == negative attri"utes or dis0ualifications which would render a person incapa"le of "eing appointed as an independent director. These are more or less on the lines of the recommendations of the two Committees. The proposed section also contains for providing compulsory training to independent directors from such institutions as may "e prescri"ed "y the 5overnment. O;I4CTI64 O# 5OOD 5O64RN&NC4 It is felt that the o".ective of corporate governance i.e.! the overall o".ective of wealth generation and competitiveness for the "enefit of all can "est "e achieved through the twin components of 9 ' &n JinclusiveK approach to directors% duties which re0uires directors to have regard to all the relationships on which the company depends and to the long! as well as the short) term implications of their actions! with a view to achieving company success for the "enefit of shareholders as a whole, and ' /ider pu"lic accounta"ility9 this is to "e achieved principally through improved company reporting! which for pu"lic and very large private companies will re0uire the pu"lication of a "road operating and financial review which e(plains the company%s performance! strategy and relationships *e.g. with employees! customer and suppliers as well as the wider community+. /12 4LC4<<4NC4 IN COR3OR&T4 5O64RN&NC47 ;usiness e(cellence has several connotations. 4(cellence denotes outstanding performance! superior 0uality and consistently e(traordinary service especially in the face of severe hardships. The word conveys a value)driven approach consisting of respect for humanity! compassion and a positive and proactive attitude towards solving pro"lems while achieving rapid growth. The future has no shelf life. If today%s technology is yesterday%s magic! there is an imperative need to "e innovative and creative to "ring more e(cellence in vision and mission and products and services. This is a message for Indian corporates and the whole economy of the country! which is going through the phase of churning where centuries old values! structures and practices are giving way to new paradigms comprising new rules of the game. The scenario calls for "ench mar$ing of standards of e(cellence in all spheres of corporate activities! as it has "ecome sine qua non for growth and long)term sustaina"ility of companies. The scenario also calls for e(cellence in performance which can "e achieved only through adherence to good corporate governance principles! such as accounta"ility! transparency! pro"ity! 0uality of information and "y fulfilling their o"ligations towards society! the nature and the human well "eing. Our success in the future will "e entirely dependent upon our a"ility to identify the opportunities! synergies our strengths and s$ills successfully and turn the challenges into opportunities. This is more important for corporate governance than for any other aspect of the economy. -ore so! when corporatisation is "ecoming a way of life with primary! secondary and tertiary sectors increasingly opting for corporate paradigms. C1&<<4N54: ;4#OR4 -&N&54R: It would help a great deal if advocates of corporate governance were to appreciate the challenges "efore managers. The current "usiness environment calls for much stronger leadership and speedier decisions than any time in the past. /hile glo"alisation offers new opportunities! it has enormously raised ris$s and uncertainties. Coping with these has "rought C4Os at the center stage and often encouraged centrali ation of $ey decisions. &lthough several managers have "uilt great organisations and rewarded shareholders! many have fallen victim to glorification. 4ven a cursory study of managerial e(cellence models would show that these are far less dura"le than made out "y management gurus! $een to produce "oo$s. In addition to

glorification of individual manager what has aggravated the pro"lem is performance "ased reward. #inancial recognition is indeed an important motivation for managerial e(cellence "ut it has gone over"oard. &t some point in this process the value "ase of manager has changed and financial compensation emerged as the sole motivator. /hat has created enormous psychological stress is measurement of 8performance% "y investors and securities analysts on the "asis of 0uarterly results. These developments constitute principal e(planation of widespread dishonesty as fudging of financials and creative accounting. :eldom can a "usiness create 8shareholder value% 0uarter after 0uarter. 4(cessive ris$s! e(pensive and e(isting mergers! ruthless restructuring *downsi ing+ have all emerged as measures of managerial e(cellence and "asis of limitless rewards! without! as passage of time has revealed! creating any lasting value for "usiness! sta$eholders and society at large. Underlying spirit of corporate governance got destroyed in three ways. One! e(ternal chec$s and "alances such as auditors were 8"rought in% through "ait of lucrative consultancy assignments and independent directors through hefty commissions. Two! if auditors and "oards did not fall in line! they were replaced. #inancially! if this was not possi"le! managers found ways of $eeping things away from the "oard and shareholder scrutiny. -anagers feeling threatened "y increase in shareholder and "oard power have converted corporate governance into a chor)police game. <i$e a prover"ial Indian politician! many C4Os resorted to unfair means with a single)mined o".ective of condensing lifetime compensation while in control of "usiness. Overpowered "y greed many succum"ed to temptation for assumption of massive wealth and securing post)retirement o"scene lifestyle without $nowledge of the shareholders and not disclosed in the annual reports. 3u"lic disclosure of such conduct has shattered the myth that compliance with form of governance is a guarantee of good practice. -yth that professional managers! unli$e owner)managers! are not suscepti"le to frauds is also shattered. The universal response of regulators is to tighten the rules and ma$e them more detailed. Inevita"le implication of regulatory tightening is that good managers have to spend more time in compliance than on "usiness issues. -ore often than not enterprise and innovation as well as ris$ ta$ing would suffer if corporate governance "ecomes regulator driven. CONC<U:ION The forces of glo"alisation and technology are continuously reshaping the world. &ccording to a recent United Nations Development Report *UND3+! technology is creating the potential to reali e in a decade progress that re0uired generations in the past. Corporations across the world are now creating new standards of speed! efficiency and productivity across all sectors. Corporate governance is proclaimed to "e the only glo"al highway for corporate success in the present rapidly changing economic environment. The credi"ility of the "usiness system! world trade! glo"alisation and the new emerging economic order depends on good corporate governance. 1igher success leads to higher degree of corporate e(cellence! which is claimed to "e foster child of corporate governance. 5overnment has in last two years e(pedited the process of legal reforms to ensure that a conducive efficient and effective governance mechanism is put in place to allow constituents of reforms process to withstand the convulsions unleashed "y the glo"alisation process! in terms of growing competition and increasing incidence of corporate sic$ness and insolvency. 4(cellence in corporate performance thorough "etter corporate governance is not a one time goal "ut it would "e an ongoing e(ercise. There cannot "e a full stop on the road to e(cellence! a company however successful it may "e it cannot afford to rest on its laurels! as every day will "ring new challenges. Corporates have to "e proactive! set a goal for attaining highest standards of corporate e(cellence. R4#4R4NC4: =. :ouvenir'IC:I National &ward for 4(cellence in Corporate 5overnance! Novem"er BCC=. B. :ouvenir':econd IC:I National &ward for 4(cellence in Corporate 5overnance! Decem"er BCCB.

A. Chartered :ecretary! &ugust BCCA.