The importance of corporate governance in today’s progressive and aggressive business environment cannot be denied. According to the Financial Times, it’s “crucial to the achievement of a new frontier of competitive advantage and profitability.

The Significance of Corporate Governance  in Development – The Experiences of Brazil, Chile, India and South Africa. by C. Oman, CIPE and OECD Development Centre, 2003. The chapters on India are authored by Omkar Goswami, who is also the writer of the report on India for this BEI study. Comparative Analysis of Corporate Governance in South Asia.

Why is there all this attention to corporate governance, not only in South Asia but throughout the World? This comparative analysis provides clear answers to the question. The South Asian Country studies show that the attention to corporate governance was motivated not by the East Asian financial crisis in 1997/98 (which did not involve South Asian countries, though the whole of Asia was effected by the fear of ‘contagion’), nor by the scandals in America, Australia, Britain and Canada, in the late 1980’s and early 1990’s, which led to the high profile reports such as from the Bosch, Cadbury and Dey committees and gave such prominence to the previously scarcely known subject of ‘corporate governance’, but by home-grown problems in their own financial markets.

Corporate governance is the way a corporation polices itself. In short, it is a method of governing the company like a sovereign state, instating its own customs, policies and laws to its employees from the highest to the lowest levels. Corporate governance is intended to increase the accountability of your company and to avoid massive disasters before they occur. Failed energy giant Enron, and its bankrupt employees and shareholders, is a prime argument for the importance of solid corporate governance. Well-executed corporate governance should be similar to a police department’s internal affairs unit, weeding out and eliminating problems with extreme prejudice. A company can also hold meetings with internal members, such as shareholders and debtholders – as well as suppliers, customers and community leaders, to address the request and needs of the affected parties.

In India there was the securities scam (involving a large number of banks) leading to the stock market crash in 1992, followed by the consolidation of equity ownership by multinational companies listed on the stock markets, and then by the stock market bubble in 1993 and crash of the ‘disappearing companies’ in 1994, which devastated the primary market until the end of the century. These led to the formation by the Confederation of Indian Industry of the Bajaj Committee on corporate governance in late 1995, well before the East Asian financial crisis. In addition, the country report shows how the Indian capital markets had reached a crisis-point where the accumulated distortions of decades of restrictive state policies and of corporate control (traced back to the ‘managing agencies’ in the earliest days of the stock markets in the 19th Century) had highlighted the need for urgent capital market reform.

In Sri Lanka, the concern for corporate governance originated in the numerous company failures,

especially finance companies, in the late 1980’s and early 1990’s, which caused investors to lose faith in the regulatory and semi-regulatory frameworks, as well as the standards of financial Reporting. Accordingly, the Institute of Chartered Accountants of Sri Lanka set up a task force in 1992 (about the same time as the Cadbury committee in UK) to enforce Sri Lankan accounting standards, and then extended this initiative in 1996 (again before the East Asian financial crisis) to set up a committee to make recommendations on the financial aspects of corporate governance.

Pakistan commenced its corporate governance programmes later, following the Securities and

Exchange Commission of Pakistan Act in 1997, the commencement of operations by the Commission in 1999, and the introduction of the national Code for Corporate Governance in early 2002. But despite the later start, it is evident from the country report that the initiatives in

Pakistan were driven by home-grown realities, in particular the recognition that the traditional structures and operations of the capital market, especially lending from state-owned banks, could no longer sustain the financing needed for growth, hence there is a critical need for reform of the capital markets in order to mobilize domestic savings and foreign portfolio investment, as there had been in India a decade earlier. In fact, despite the later start with formal national policies, it could be said that Pakistan focused on corporate governance earlier than many countries in the world, not just the region – the Pakistan country report emphasizes the importance of the 1984 Companies Ordinance Act, which introduced a number of key features of good corporate governance, at a time when the very term ‘corporate governance’ had only just been coined and was still effectively unknown outside very specialized academic circles2. Furthermore, during the mid-1980s there were some significant policy and training programmes to strengthen corporate control, board direction and chairmanship in both the state enterprises and the private sector,

through the Expert Advisory Cell of the Ministry of Industry and the Lahore University of Management Sciences and Institute of Personnel, supported by USAID. Although these The origin of the term ‘corporate governance’ is generally credited to Professor Tricker in 1984.

Comparative Analysis of Corporate Governance in South Asia programmes were not described as ‘corporate governance’, they could be said to form part of the corporate governance heritage of Pakistan.

In Bangladesh, however, there have been no serious corporate scandals which have been enough to send shock waves to undermine confidence in the financial system, nor has the country found that it has reached the limits of conventional corporate financing mainly through bank lending. The country report identifies that “the relatively low level of international investment in Bangladesh does not provide a sufficient motivation for improving corporate governance, nor are there many traditional domestic motivations for improvement in corporate governance practices in Bangladesh”. Nevertheless, the report concludes that this does not mean that Bangladesh should give low priority to corporate governance, as there are reasons other than capital market reforms to focus on corporate governance. The Bangladesh country report notes the significance of corporate governance for a competitive private sector in a global market as well as for efficiently utilizing domestic investment to achieve greater economic development. Good corporate governance practices will help develop and stimulate better business management, strategic management, and risk management, which, in the long-term, will make Bangladeshi businesses more competitive. In addition, the lessons from the experience of the neighbouring countries in South Asia are such that Bangladesh can deploy good corporate governance to prevent the problems which have afflicted other countries rather than to solve them after the event.

The country reports go beyond describing the significance of corporate governance in theoretical and policy terms – they also provide indications of the effectiveness of corporate governance. Perhaps the most important question for corporate governance is whether well-governed companies perform better (in terms of growth, profitability and share price) and behave better (in terms of corporate social and environmental responsibility and of corporate citizenship, especially in tackling the supply side of corruption) than do badly-governed companies. Good corporate governance is virtuous, but does it deliver results? It could be said that this question implicitly runs like a theme through the Bangladesh country report, and explicitly emerges in conclusions such as “nor are there many traditional domestic motivations for improvement in corporate governance practices in Bangladesh”. There is a possible challenge that, unless there are satisfactory answers to this question of the efficacy of corporate governance, Bangladesh – and other countries – will, quite reasonably, not be convinced of the need to assign high priority to corporate governance programmes. As the author of the India country report remarked on his second page: “by the middle of 2001, however, most of Asia was getting back to a concerted growth phase, and the psyche of investors had swung from fear to greed.” Not unsurprisingly, there were incipient signs that while every country was faithfully mouthing the mantras, the spirit of corporate governance was being prepared for a quiet burial in most. Thankfully, then came

Enron, followed by World Com, Q West, Global Crossing and the rest of their ilk.” The feelings attributed to Asia in 2001 were not new: after the sequence of the Cadbury, Greenbury and Hampel reports in Britain in 1998, there was a general complaint of ‘governance fatigue’ in the corporate sector, and a request that ‘a line be drawn under corporate governance’. Corporate governance was seen as a ‘box-ticking’ exercise in compliance with standards designed to prevent fraud and gross negligence, not as a tool to improve the real performance of companies which consider themselves to be fundamentally honest and competent – and the great majority of companies consider themselves to be so, even if some might be deluded. Enron, and Marconi in UK for different reasons, showed that corporate governance is still essential, and also demonstrated that it must be applied in the spirit as well as the letter. But the question still remains whether corporate governance can enhance the performance of fundamentally sound companies, and must be answered, not by another scandal, but by consistently improved performance by well-governed companies.

Principles of Corporate Governance

  • Shareholder recognition is key to maintaining a company’s stock price. More often than not, however, small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Good corporate governance seeks to make sure that all shareholders get a voice at general meetings and are allowed to participate.
  • Stakeholder interests should also be recognized by corporate governance. In particular, taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press.
  • Board responsibilities must be clearly outlined to majority shareholders. All board members must be on the same page and share a similar vision for the future of the company.
  • Ethical behavior violations in favor of higher profits can cause massive civil and legal problems down the road. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard if ignored. A code of conduct regarding ethical decisions should be established for all members of the board.
  • Business transparency is the key to promoting shareholder trust. Financial records, earnings reports and forward guidance should all be clearly stated without exaggeration or “creative” accounting. Falsified financial records can cause your company to become a Ponzi scheme, and will be dealt with accordingly.

Comparative Analysis of Corporate Governance in South Asia It has to be acknowledged that, globally as well as in the South Asia region, these are still early days for the full assessment of the results which can be achieved by corporate governance, and the task is complicated by methodological difficulties of isolating the influence of corporate governance from other factors. Hence there is still a lack of conclusive evidence on this subject.

Nevertheless, the India country report states some firm conclusions : “Indian corporations have Nappreciated the fact that good corporate governance and internationally accepted standards of accounting and disclosure can help them to access the US capital markets . . .with Infosys making its highly successful NASDAQ issue 1 March 1998, followed by ICICI, Satyam Infoways,Satyam, ICICI Bank, Wipro, HDFC Bank, Dr. Reddy’s Laboratories and others …this has shown that good governance pays off and allows companies to access the world’s largest capital market; second, it has demonstrated that good corporate governance and disclosures are not difficult to implement … the message is now clear: it makes good business sense to be a transparent, well governed company.” It should also be noted that these benefits may be gained only with some ‘costs’: in order to access the US capital markets ICICI Bank voluntarily recast its accounts for 1999 in terms of US accounting standards, which eroded its bottom-line by a third – but gained enormous investor confidence so that its domestic initial public offer was oversubscribed by 80%.

Corporate Governance as Risk Mitigation

Corporate governance is of paramount importance to a company and is almost as important as its primary business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. It also enhances a company’s image in the public eye as a self-policing company that is responsible and worthy of shareholder and debtholder capital. It dictates the shared philosophy, practices and culture of an organization and its employees. A corporation without a system of corporate governance is often regarded as a body without a soul or conscience. Corporate governance keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners will be cut, products will be defective and management will grow complacent and corrupt. The end result is a fall that will occur when gravity – in the form of audited financial reports, criminal investigations and federal probes – finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.

This case has a resonance of the experience of Siemens, which found that its impressive profitability was turned into a loss the first time it had to present its accounts under US rather than German accounting standards. The India country report also concludes with the benefits of capital market reforms, of which corporate governance is an essential part. These benefits include the “phenomenal growth in market capitalization, (which) has triggered a fundamental change in mindset from appropriating larger slices of a small pie, to doing all that is needed to let the pie grow, even if it involves dilution of share ownership”, and the increase in foreign portfolio investors, who have “voted with their feet. Over the last two years they have systematically increased their exposure in well governed firms at the expense of poorly run ones.” Finally, there has been the restructuring of the Indian corporate sector, which is a consequence not only of corporate governance but of the whole package of reforms. The India country report highlights that by 2002, 22 out of the top 50 Indian companies in terms of market capitalization either did not exist or were not listed on any stock exchange in 1991, and 35 out of the top 50 companies in 2002 are now professionally managed, while the rank of the top 50 companies in 1991 fell by an average of 88 points on the stock market. Thus, the questions which may be posed in Bangladesh are: in 2015, which will be the top companies on the Dhaka and Chittagong stock exchanges, and how large will they be, without corporate governance reforms, and with corporate governance.

The Sri Lanka country report also indicates the tangible benefits of good corporate governance – but, it should be noted, with some serious caveats concerning the actual practice of good corporate governance as opposed to the pro-forma presence of the main criteria of good corporate governance. The Sri Lanka country report included a sample survey of 21% of all the companies listed on the Colombo Stock Exchange, and found that the average score was 45% of the total achievable 19 criteria for good corporate governance.

However, some companies scored significantly higher with over 60%, and it was found that these companies had outperformed the stock market index. The report therefore concludes that “while there may be a number of factors influencing the performance of a company, we believe that corporate governance disclosure and good corporate governance practices are a significant contributory factor.”

In addition to the country reports, there are external indicators that good corporate governancegenerates improved performance and benefits to companies. McKinsey’s Global Investor Surveyhas long been quoted as evidence of the advantages of corporate governance, and the 2002 surveyshowed that over 80% of Asian investors ranked good corporate governance as equally or more

Comparative Analysis of Corporate Governance in South Asia important as financial issues, and 78% said that they would be willing to pay a premium for shares in a well governed company. In May 2003, the Asian Corporate Governance Association released its annual survey of corporate governance in Asia, covering 10 countries and 380 companies across the region. Among the major findings were that companies with strong governance outperformed their markets by an average of 35 percentage points over 5 years (1998- 2002), while those with poor governance underperformed by 25 percentage points over the same period. The average company score in corporate governance standards has risen by 4 percentage points – from 58% in 2002 to 62% in 2003 – but the range in company scores remains extremely wide and a cause for concern, so that the survey concludes – like the Sri Lanka country report – that “much of the improvement in CG is in form rather than substance.” Nevertheless, the indicators are that where form is indeed backed by substance there are significant gains to the company.