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‘Principle-Based Governance Works’

Photo Credit :

Godrej Group

Companies in developed countries have managed to separate management and ownership. Most Indian companies, however, are promoter-run with members of the family at various levels in the management. This can lead to a conflict of interest, recently highlighted in the case of Satyam Computers, unless carefully tempered. Implementing principle-based governance and, encouraging professional independent directors are some of the ways the Godrej Group ensures this balance — and some of its group companies have even gained highest ratings in terms of stakeholder value creation and management, as well as corporate governance practices by ICRA. Once chairman of the Confederation of Indian Industry (CII)’s council of corporate governance, Adi Godrej, chairman of Godrej Group, shares his views with BW’s Manashwi:

How has the situation at Satyam affected the perception of India Inc. in terms of corporate governance?
I don’t think it has dented corporate India’s image at all. it is criminal behaviour, and has nothing to do with corporate governance. We should treat it as an aberrational behaviour and not take it as any landmark or important reason why corporate governance should be dented in India. International investors in India are all registered FIIs; they too realise that this is anaberration, it happens in other countries also. It’s difficult to root out criminality completely; it is bound to raise its ugly head time and again. In the Satyam case, the government has acted very quickly to assuage the investors and to see that the company continues on its path of progress. So, that was a good message we sent out to the rest of the world.

In India, a majority of the companies are run by promoters. What is the incentive for them to follow good governance?
Several. First of all, one thing is very clear — with the Satyam episode perhaps more so — that good governance will lead to better market capitalisation. And market capitalisation helps the promoter group raise funds and more investors. The message is loud and clear that bad CG is negative for both the company and the promoter. Another thing that was apparent after the Satyam case was that when a promoter holds a very small share, the incentive for good CG becomes lesser. When a promoter holds a large share, anything going wrong in the company hurts him very badly.

What kind of reporting should be made mandatory?
According to Sebi regulations, we have a very comprehensive list of items that have to appear in the annual report, in what format, what needs to be done at the board level, etc. So, I think we have some of the best standards of corporate governance in the world today. Clearly, execution and implementation is important, but the basis of governance is good. A couple of years ago, CLSA — a major analyst and investing company — had rated us third, after Hong Kong and Singapore.

Since it is more of an ethical issue rather than a legal one, how far can regulatory impetus ensure governance?
Yes, of course. Corporate governance should not be driven only by regulation. We need to have the basic regulations, but it should be principle-based; because by doing so you ensure that CG is followed in both difficult and easy times. A friend of mine once remarked that we shouldn’t make the regulations such that they become weapons of mass distraction. If you have too many things to adhere to, you are distracted from the company affairs.

Several committees have highlighted aspects of CG that could be improved, but with little success. Are companies waiting for the regulators to enforce practices?
No. A couple of years ago Sebi brought in clause 49, which added a lot of value to governance. The J.J. Irani committee produced a report on the companies act amendment, which has been taken forward. Though they might not become legislation immediately, once they are published, many companies will start adopting the practices.

Clause 49 also recommended the number of independent directors on the board. But there appears to be shortage of people qualified for the job.
Not really. The CII and many other agencies have a list of potential independent directors to choose from. It is very important that independent directors be truly independent. All committees in the Godrej group — audit, nomination, shareholders — consist of independent directors only. So there is no promoter influence on the decisions taken by them. But still, it will be terrible if the government were to appoint independent directors for a company. It is a learning process, and today, at least 20 Indian companies are among the best governed in the world.

How does Godrej ensure good governance?
I’ll take the example of Godrej Consumer Products, which is our highest market cap listed company — we hold about 70 per cent of the shares. When we first set up the board, we invited independent directors who had professional reputation, not industrialist friends. I think industrial friends are not able to devote enough time to the company. Secondly, all our board meetings last at least half a day — no perfunctory meetings. Every year, the January board meeting is a two-day offsite affair, which devotes a lot of time on strategy.

How would you define corporate governance?
Our corporate governance is much beyond the legal minimum that is prescribed. It looks into the interests of all stakeholders. One of the misconceptions is that it is to protect the interests of the minority shareholders. But I think it is to protect the interests of the company as a whole.

Difficult times such as now gives a good excuse to companies not to adhere to good governance. What is your take on that?
That is a mistake, if they do. Some of the best corporate governance is from the new IT companies. Young entrepreneurs have strong principles. In fact, negative governance is practiced by old family businesses who believe that protecting the interest of the promoter is vital. But that perception is changing.

(Businessworld Issue Dated 27 April-04 May 2009)