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A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE), is a corporation or enterprise that manages production or delivers services in more than one country. It can also be referred as an international corporation. ILO defined MNC as a corporation which has his managerial head quarters in one country known as the home country and operates in several other countries known as host countries. The first modern MNC is generally thought to be the Poor Knights of Christ and the Temple of Solomon, first endorsed by the pope in 1129. The key element of transnational corporations was present even back then: the British East India Company and Dutch East India Company were operating in different countries than the ones where they had their headquarters. Nowadays many corporations have offices, branches or manufacturing plants in different countries than where their original and main headquarter is located. This often results in very powerful corporations that have budgets that exceed some national GDPs. Multinational corporations can have a powerful influence in local economies as well as the world economy and play an important role in international relations and globalization. The presence of such powerful players in the world economy is reason for much controversy.
• Tax competition Multinational corporations have played an important role in globalization. Countries and sometimes sub national regions must
compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards enforcement. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both. However, some scholars for instance the Columbia economist Jagdish Bhagwati, have argued that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardization. Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) which has the most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US (though it is worth noting that higher American productivity—linked to technology—means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they performed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates. Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g.,
expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the supposed 'race to the bottom' may be overstated, while the substantial benefits which MNCs bring (tax revenues aside) are often understated. • Market withdrawal Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal. For example: In an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs. When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil, which have viable indigenous market competitors. • Lobbying Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations.
There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR: This is very serious and is very hard and takes a lot of work for the owner. Multinational corporations such as Wal-mart and McDonald's benefit from government zoning laws, to create barriers to entry. Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly. Patents Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs; Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents. The Pharmaceutical companies lobby international agreements to enforce patent laws on others. Government power In addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational's
power. These issues become of increasing importance because of the emergence of MNCs in developing countries.[
Micro-multinationals Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers. ("How startups go global".) These multinationals start operating in different countries from the very early stages. These companies are being called micromultinationals. ("Technology Levels the Business Playing Field".) What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses. Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries. Internet tools like Google, Yahoo, MSN, EBay and Amazon make it easier for the micromultinationals to reach potential customers in other countries. Service sector micro-multinationals, like Face book, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities Criticism of multinationals Main article: Anti-corporate activism
Anti-corporate activism in New York The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists and laypersons that have seen it as a threat of such basic civil rights as privacy. They have pointed out that multinationals create false needs in consumers and have had a long history of interference in the policies of sovereign nation states. Evidence supporting this belief includes invasive advertising (such as billboards, television ads, adware, spam, telemarketing, childtargeted advertising, guerilla marketing), massive corporate campaign contributions in democratic elections, and endless global news stories about corporate corruption (Martha Stewart and Enron, for example). Anti-corporate protesters suggest that corporations answer only to shareholders, giving human rights and other issues almost no consideration. Films and books critical of multinationals include Surplus: Terrorized into Being Consumers, The Corporation, The Shock Doctrine, Downsize This and others. Multinational companies are the organizations or enterprises that manage production or offer services in more than one country. And India has been the home to a number of multinational companies. In fact, since the financial liberalization in the country in 1991, the number of multinational companies in India has increased noticeably. Though majority of the multinational companies in India are from the
U.S., however one can also find companies from other countries as well. DESTINATION INDIA: The multinational companies in India represent a diversified portfolio of companies from different countries. Though the American companies - the majority of the MNC in India, account for about 37% of the turnover of the top 20 firms operating in India, but the scenario has changed a lot off late. More enterprises from European Union like Britain, France, Netherlands, Italy, Germany, Belgium and Finland have come to India or have outsourced their works to this country. Finnish mobile giant Nokia has their second largest base in this country. There are also MNCs like British Petroleum and Vodafone that represent Britain. India has a huge market for automobiles and hence a number of automobile giants have stepped in to this country to reap the market. One can easily find the showrooms of the multinational automobile companies like Fiat, Piaggio, and Ford Motors in India. French Heavy Engineering major Alstom and Pharma major Sanofi Aventis have also started their operations in this country. The later one is in fact one of the earliest entrants in the list of multinational companies in India, which is currently growing at a very enviable rate. There are also a number of oil companies and infrastructure builders from Middle East. Electronics giants like Samsung and LG Electronics from South Korea have already made a substantial impact on the Indian electronics market. Hyundai Motors has also done well in mid-segment car market in India. WHY ARE MNC IN INDIA? There are a number of reasons why the multinational companies are coming down to India. India has got a huge market. It has also got one of the fastest growing economies in the world. Besides, the policy of the government towards FDI has also played a major role in
attracting the multinational companies in India. For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a result, there was lesser number of companies that showed interest in investing in Indian market. However, the scenario changed during the financial liberalization of the country, especially after 1991. Government, nowadays, makes continuous efforts to attract foreign investments by relaxing many of its policies. As a result, a number of multinational companies have shown interest in Indian market.
FOLLOWING ARE THE REASONS WHY MNC CONSIDERED INDIA AS PREFERRED DESTINATION FOR BUSINESS: • Huge market potential of the country • FDI attractiveness • Labor competitiveness • Macro-economic stability LIST OF MNC IN INDIA: The list of multinational companies in India is ever-growing as a number of MNCs are coming down to this country now and then. Following are some of the major multinational companies operating their businesses in India: • British Petroleum
Vodafone Ford Motors
• • •
LG Samsung Hyundai
• Accenture • Reebok • Skoda Motors
ABN Amro Bank
Multinational Corporations: Myths and Facts by Gary M. Quinlivan:
Many religious leaders are increasingly troubled by the growing presence of multinational corporations around the world, especially in poor and developing nations. In truth, such concern is warranted, but only if the allegations against multinational corporations are true. Such allegations include the charge that profit-motivated multinational corporations are engaging in destructive competition and insidious plots to economically and politically manipulate entire economies. Further, multinational corporations are perceived to be methodically eliminating domestic firms in order to exploit their monopoly powers, exporting high-wage jobs to low-wage countries, undermining the world’s environment, augmenting the external debt problems of developing
countries, perpetuating world poverty, and exploiting child labor. But are such allegations, in fact, true? Religious leaders should examine the data so that they can draw reasonable conclusions about the impact of multinational corporations. Such an examination reveals that multinational corporations, in fact, have actualized numerous moral goals: the advancement of human rights, the improvement in the world environment, and, most importantly, the reduction of world poverty rates. Critics of multinational corporations often profess to have a higher moral vision and to be pursuing a world with laudable goals of just wages and a clean environment. On the other hand, the extreme left conveniently ignores the socially destructive behavior of those economies that rely heavily on governmental regulations and stateoperated monopolistic enterprises. These economies have incurred extreme rates of poverty, repressed human rights, and excessive environmental damage. For reasons mentioned below, the problem countries have almost no multinational corporations and are concentrated in sub-Saharan Africa, South Asia, North Africa, and the Middle East. Paradoxically, the extreme left is hindering the momentum to decrease world poverty rates and is deaf to the continued suffering of the extreme poor. The left is quick to offer welfare to developing countries but, unfortunately, this hinders poor nations from becoming self-supporting. The extreme right, on the other hand, offers no charity and joins the left in denouncing trade. To be open minded, we must also consider the views of the developing countries, which almost in unison believe that the movement against multinational corporations will not only hinder their economic progress but will also most likely reverse it. As Nobel Peace Prize Laureate and former president of Costa Rica, Oskar Arias, exclaimed
at an August 2000 lecture to United Nations delegates and heads of state, “We [the developing countries] don’t want your [the developed countries] handouts; we want the right to sell our products in world markets!” President Arias is referring to a right possessed by all developed countries and purposely denied to almost all developing countries for more than five decades. Now let’s address some of the myths that critics of multinational corporations claim to be facts. This article does not, however, deny that there are specific cases that reflect badly on all multinational corporations (Nike’s past problems with child labor and other media evidence of the wanton disregard of environmental responsibilities are but two examples). Such cases, however, are rare, given that there are over 60,000 multinational corporations.
Monolithic Monopoly Power?
Competition is not destructive; it has compelled multinational corporations to provide the world with an immense diversity of highquality and low-priced products. Competition, given free trade, delivers mutually beneficial gains from exchange and sparks the collaborative effort of all nations to produce commodities efficiently. As a consequence, competition improves world welfare while dampening the spirit of nationalism and, thus, promoting world peace.
Has the monopoly power of multinational corporations grown?
Granted, some multinational corporations are very large: As of 1998, they produced 25 percent of global output, and, in 1997, the top one hundred firms controlled 16 percent of the world’s productive
assets, and the top three hundred controlled 25 percent. Firm size and market power, however, are dynamic. The Wall Street Journal annually surveys the world’s one hundred largest public companies ranked by market value. Comparing the rankings in 1999 to that of 1990, there were five new firms (Microsoft, Wal-Mart, Cisco Systems, Lucent Technologies, and Intel) in the top ten, and four of these firms were not in the top one hundred in 1990. More remarkably, there were sixty-six new members in the 1999 list. Similarly, the United Nations tracks the one hundred largest nonfinancial multinational corporations ranked by foreign assets. Although not as dramatic as the change in the Wall Street Journal rankings, the United Nations reported a 25 percent change in the composition of its top one hundred from 1990 to 1997. According to the conventional wisdom, an increase in monopoly power should also lead to fewer and larger multinational corporations, but, as reported by the United Nations, the number of multinational corporations tripled from 1988 to 1997.
Has the increase in foreign direct investment by multinational corporations harmed domestic investment?
(Foreign direct investment occurs whenever a firm locates a factory abroad or purchases more than ten percent of an existing domestic firm.) The United Nations’ World Investment Report 1999 cited two recent studies. The first, by Eduardo Borensztein, José de Gregorio, and Jong-Wha Lee, found that an additional dollar of foreign direct investment increases domestic investment in a sample of sixtynine developing countries by a factor of 1.5 to 2.3. The second study, conducted by the United Nations, reached the same conclusion as the first for countries in Asia, but it offered some disputable evidence of a possible negative impact on Latin America. Notably, coordinated international manipulations of markets are rarely conducted by large multinational corporations but are almost
always government supported and directed (for example, opec, the Association of Coffee Producing Countries, and the Cocoa Producers Alliance). Further, government-sponsored cartels are not concerned about the poor. In the 1970s, opec’s price distortions were a major source not only of world recession but also of the increased external debt and poverty of developing countries. Free markets protect the poor from the prolonged abuses of cartels. Rapacious Economic Exploitation? Concerns about multinational corporation infringements on national sovereignty lack substance. Multinational corporations do not operate with immunity; they are heavily monitored both in the United States and abroad. From 1991 to 1998, according to the United Nations, there were 895 new foreign direct investment regulations enacted by more than sixty countries. Further, multinationals are not siphoning jobs from high- to low-wage countries; in fact, they tend to preserve high-wage jobs in developed countries; in 1998, 75 percent of foreign direct investment went to developed countries. Besides, labor costs alone do not determine where multinational corporations base their affiliates; other variables–such as political stability, infrastructure, education levels, future market potential, taxes, and governmental regulations–are more decisive. In 1998, multinational corporations had eighty-six million employees–nineteen million in developing countries– and were also responsible, indirectly, for another 100 million jobs. The jobs created abroad also tend to pay far more than the domestic employers do. Based on an August 4 2000, discussion with both the general manager of Chesterton Petty and the senior manager of Price Waterhouse Coopers in Beijing, their Chinese employees average approximately $10,000 per year–a small fortune in China, where an upper-middle-class
full professor or medical doctor brings home slightly more than $200 per month in the city of Jinan. Evidence supplied by the World Bank and United Nations strongly suggests that multinational corporations are a key factor in the large improvement in welfare that has occurred in developing countries over the last forty years. In sub-Saharan Africa and South Asia, where the presence of multinational corporations is negligible, severe poverty rates persist and show little sign of improvement. For example, from 1980 to 1998, world child labor rates (the percentage of children working between the ages of ten and fourteen) tumbled from 20 to 13 percent. Child labor rates dropped from 27 to 10 percent in East Asia and the Pacific, from 13 to 9 percent in Latin America and the Caribbean, and from 14 to 5 percent in the Middle East and North Africa. Interestingly, regions lacking multinational corporations had the worst child labor rates and the smallest reductions: Sub-Saharan Africa’s and South Asia’s child labor rates dropped from 35 to 30 percent and from 23 to 16 percent, respectively. This reduction in rates was attributable to increased family income, which has permitted families to improve their diets, to have better homes, and to provide their children with more educational opportunities. School enrollment rates for ages six to twenty-three rose for all developing countries from 46 percent in 1960 to 57 percent in 1995. Only sub-Saharan Africa had an enrollment ratio below 50 percent in 1995. Moreover, multinational corporations are not committed to the destruction of the world’s environment but instead have been the driving force in the spread of “green” technologies and in creating markets for “green products.” Market incentives such as threat of liability, consumer boycotts, and the negative impact on reputation have forced firms to police their foreign affiliates and to maintain
high environmental standards. The United Nations’ World Investment Report 1999 notes several studies that confirm foreign affiliates having higher environmental standards than their domestic counterparts across all manufacturing sectors. The United Nations also positively reflected on the efforts initiated by multinational corporations to assist domestic suppliers (“regardless of ownership”) to qualify for eco-labeling and to meet environmental standards currently supported by more than five thousand multinational corporations. Multinational corporations have also advanced several programs (the Global Environmental Management Initiative and the Global Sullivan Principles, among others) to establish industry codes dedicated to achieving high levels of social responsibility. A United Nations survey of multinational corporations revealed that the primary reason multinational corporations do not invest in certain countries is the presence of extortion and bribery; not surprisingly, the main source of the corruption is governmental officials. Both the International Chamber of Commerce and the International Organization of Employers have established social codes and standards that attempt to establish principles for responsible environmental management.
The Crucial Role of Peace and Freedom:
When multinational corporations make profits, this does not mean that developing countries are being exploited. Both the multinational corporations and domestic country are better off–the developing country receives jobs, an expanded tax base, and new technologies. If the investment does not do well, the multinational corporations may lose their investment and the developing country does not receive the aforementioned benefits, but the developing country owes no restitution. As a result, multinational corporation
investments do not contribute to the external debt problems of developing countries. According to the United Nations, in 1998, $166 billion, or 25.8 percent of the world foreign direct investment went to developing countries. Only $2.9 billion of foreign direct investment was obtained by the least developed countries, which are primarily composed of the sub-Saharan African countries. Given risk conditions, capital flows to where it can earn the highest rate of return. The required risk premium is much higher when a developing country is experiencing civil wars, suffers from over-regulation, has a weak infrastructure, is politically unstable, keeps its markets closed to foreign competition, has inflexible labor markets, and imposes high taxes. The Heritage Freedom Index measures the degree of economic and political repression present in developing countries. As predicted, foreign direct investment is smaller in developing countries that are repressed. Based on the 2000 Heritage Freedom Index, of the eighteen economies in the Middle East and North Africa, ten are either mostly unfree or repressed, and only Bahrain is free. The results are more dismal for sub-Saharan Africa; thirty-five (make that thirty-six, given Robert Mugabe’s policy of land-grab terrorism) of the forty-two economies in the region are mostly unfree or repressed. Developing countries must be allowed to further themselves economically through free markets and the expansion of multinational corporations. Such countries want jobs, not welfare. Furthermore, what is comforting but not easily understood is that the promotion of trade increases the welfare not only of developing countries but also of developed ones; free trade is a positive-sum game. Gary M. Quinlivan, Ph.D., is the executive director of the Center for Economic and Policy Education, chair of the economics, political science, and public policy departments at Saint Vincent
College, and a contributing editor to Religion & Liberty. He has coedited or authored eleven books, including his most recent, Public Morality, Civic Virtue, and the Problem of Modern Liberalism, coedited with T. William Boxx, (Eerdmans).
INTRODUCTION: Recently the terms "governance" and "good governance" are being increasingly used in development literature. Bad governance is being increasingly regarded as one of the root causes of all evil within our societies. Major donors and international financial institutions are increasingly basing their aid and loans on the condition that reforms that ensure "good governance" are undertaken.
Definition of corporate governance:
"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and
communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society." "Corporate governance is about promoting corporate fairness, transparency and accountability" J. Wolfensohn, president of the Word bank, as quoted by an article in Financial Times, June 21, 1999. Corporate governance comprises the systems and processes which ensure the efficient functioning of the firm in a transparent manner for the benefit of all the stakeholders and accountable to them. The focus is on relationship between owners and board in directing and controlling companies as legal entities in perpetuity. A company’s ability to create wealth for its owners however, depends on the role and freedom given to it by society. Sir Adrian Cadbury in his preface to the World Bank publication, Corporate Governance: A Framework for Implementation; states that, “Corporate Governance is…holding the balance between economic and social goals and between individual and community goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of these resources. The aim is to align as nearly as possible the interest of individuals, corporations and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for state is to strengthen their economies and discourage fraud and mismanagement.
The focus on corporate governance arises out of the large dependencies of companies on financial markets as the preeminent source of capital. The quality of corporate governance shapes the future and the growth of the capital market. Strong corporate governance is indispensable to resilient and vibrant capital market. In the context of globalization, capital is likely to flow to markets which are well regulated and practice high standards of transparency, efficiency and integrity.
BENEFITS OF CORPORATE GOVERNANCE:
➢ Good governance leads to congruence of interests of boards, management including owner managers and shareholders. ➢ Good governance provides stability and growth to the company. ➢ Good governance system builds confidence among investors. ➢ Good governance reduces perceived risks, consequently reducing cost of capital. ➢ Well governed companies enthuse employees to acquire and develop company specific skills. ➢ Adoption of good corporate governance practices promotes stability and long term sustenance of stakeholder’s relationship. ➢ Potential stakeholders aspire to enter into relationships with enterprises whose governance credentials are exemplary.
CORPORATE GOVERNANCE IN INDIA:
Factors influencing Corporate Governance: SEBI website has summarized the factors which influence quality of governance in Indian companies.
a. Integrity of the Management: A Board of Directors with a low level of integrity is tempted to misuse the trust, reposed by shareholders and other stakeholders, to take decisions that benefit a few at the cost of others. b. Ability of the Board: The collective ability, in terms of knowledge and skill, of the Board of Directors to effectively supervise the executive management determines the effectiveness of the board. c. Adequacy of the process: Board of directors cannot effectively supervise the effective management if the process fails to provide sufficient and timely information to the Board, necessary for reviewing the plans and the performance of the enterprise. d. Commitment level of individual board of members: The quality of a board depends on the commitment of individual members to tasks, which they are expected to perform as board members. e. Quality of corporate reporting; the quality of corporate reporting depends on the transparency and timeliness of corporate communication shareholders. This helps the shareholders in making economic decisions and in correctly evaluating the management in its stewardship function. f. Participation of Stakeholders in the management: The level of participation of stakeholders determines the number of new ideas being generated in optimum utilization of resources and for improving the administrative structure and the process. Therefore an enterprise should encourage and facilitate stakeholders’ participation. RBI ADVISORY GROUP:
The report of the Advisory Group Corporate Governance (March 2001) appointed by RBI defines corporate governance as the system by which business entities are monitored, managed and controlled. According to the advisory group a good structure of corporate governance is one that encourages symbiotic relationship among shareholders, executive directors and the board of directors so that the company is managed efficiently and the rewards are equitably shared among shareholders and stakeholders. COMMITTEE ON CORPORATE GOVERNANCE BY CHAIRMAN, KUMAR MANGALAM BIRLA, 1999: The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of Corporate Governance. The Committee’s detailed terms of the reference are as follows:
a. to suggest suitable amendments to the listing agreement
executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as continuous disclosure of material information, both financial and nonfinancial, manner and frequency of such disclosures, responsibilities of independent and outside directors; to draft a code of corporate best practices; and deal with insider information and insider trading.
c. To suggest safeguards to be instituted within the companies to
The Recommendations of the Committee :
This Report is the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets. While making the recommendations the Committee has been mindful that any code of Corporate Governance must be dynamic, evolving and should change with changing context and times. It would therefore be necessary that this code also is reviewed from time to time, keeping pace with the changing expectations of the investors, shareholders, and other stakeholders and with increasing sophistication achieved in capital markets. THE THREE ANCHORS OF CORPORATE GOVERNANCE: The three anchors of corporate governance are board of directors, management and shareholders. While each of them has important responsibilities of its own, it is their interaction with each others that is the key to effective governance. The system can become unbalanced if any one of them is not functioning well. BOARD AND MANAGEMENT: The changes introduced by focusing on board and Audit Committee composition have not succeeded in establishing a healthy distance between the management and Board. The Board should be free to monitor and the management free to manage. If the two functions are combined as under a system of Chief Executive Officer being Chairman, there is no separation of powers and functions. The policy making, strategy formulation and monitoring is done by the same person who is supposed to execute them. The efficiency of all these measures to distance Board from management would be lost if we let a person wear two hats at the same time that of Chairman of the Board and Chief Executive Officer of management.
At the outset it should be noted that letting management personnel be members of the Board how so ever senior they member by calling them full time Directors / Executive Directors has confounded the concepts of transparency and Accountability. Good Corporate Governance demands the separation of the Board and Management. Even in the case of promoters whose personal wealth is tied to the company they have to make a choice to be satisfied by being a member of the Board or Management team. This of course goes against the grain of Indian Corporate Governance, the founding family as “owners” being the Board as well as Management. Management Accountability will be nonexistent to the shareholders in such circumstances. BOARD AND SHAREHOLDERS: The regulatory efforts and operation of market force have left out this relationship in the third anchor of corporate governance. By and large shareholders do no know what the directors are doing and directors do not know what the shareholders want. Board members are elected by shareholders to serve as their agents but in practice shareholders have not exerted much influence over directors. The exchange of information between the two anchors is poor and directors are not accountable to shareholders. There is no way for shareholders to know whether the directors have acted in their interests. Although they have the right to elect board, there is no efficient mechanism to nominate or even endorse director candidates. Shareholders on their part are apathetic and mute. Their communication is limited to formal proxy votes which historically ratified board’s wishes. Shareholders have access to no mechanism through which to effect changes, except for calling an extra ordinary general body meeting. The relationship between the two anchors,
board and shareholders is not linked together in any manner or by any method except for the provision of annual general meeting. The absence of the link has created an imbalance in the governance mechanism. It has also encouraged a closer relationship and stronger link between board and management who fill the void. Directors can be effective in taking care of shareholders interests if we set up a strong structure of board shareholder relationship through ensuring transparent operation of the board meetings and enfranchisement of shareholders. Three steps mooted in this connection are record of voting at board meetings, letting shareholders put up as well as elect a director on their behalf and make resolutions passed at shareholders meeting binding. TRANSPARENCY: If the individual directors’ votes on corporate resolutions in key corporate proxy statements are recorded, the directors become accountable to shareholders. When people are held re-countable for their actions as individual rather than as a group they tend to weigh their choices more carefully. Directors would have greater incentive to air their views if individual votes are published. Such accumulated information to create directors’ score boards would supplement board self evaluation. ➢ Separate the position of CEO and Chairman of the Board as is the practice in UK and Canada.
CORPORATE GOVERNANCE IN INDIAN SETTING:
Corporate Governance when strictly followed / enforced would not allow the payments to agencies with which a company has to deal with. While political contributions are allowed extra legal payments are not allowed as payments. They can be financed only by inflating
expenditure or understanding receipts. But such practices cannot be limited and the door would open wide for manipulation of accounts. It is not just the integrity of the market that is at stake but the probity of the nation. We rank high among corrupt nations. Let us reform corporate governance but by doing so we have a much bigger job of limiting the insane greed that is eating away like cancer the vitals of our nation. Aspects of corporate governance that require attention are strengthening the board, and reducing the sweeping powers of executive directors / fulltime directors whose position undermines the balance of power between shareholders, directors and managers, accountability of management and promoting shareholders participation. GOVERNANCE REFORMS IN INDIA: First, after the Report of the Committee on Corporate Governance (Chairman, Kumar Mangalam Birla) 1999, guidelines were issued in 2000. Companies are also required to furnish statements and reports for the Electronic Data Information Filing and Retrieval (EDIFAR) system maintained by SEBI. To further improve the guidelines SEBI constituted a Committee on Corporate Governance (Chairman, N.R. Narayana Murthy) whose report was presented on 08.02.2003. The report has also set out recommendations of Naresh Chandra Committee (2003) on Corporate Audit and governance set up by Department of Company Affairs.
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