• Corporate Governance is the latest trend and the watch word in the business in India and abroad, through the entities of companies. Good governance guides a company’s directions in such a way that it can fulfil its goals and objectives in a manner that adds not only value to it but is also beneficial for all its stakeholders, in the short and the long term, whether they are shareholders, customers, employees, investors, vendor-partners, or the communities affected by its activities. It is about commitment to the values and ethical business conduct.
• Everybody seems to swear by this trend and Laws are also in place to usher in best Corporate Governance practices. There are plethora of seminars and corporate preaching and media gladly takes this subject for dissemination. No doubt this is a very praiseworthy movement in line with the international scenario and significant improvements seem to be happening!
• Most notable laws mandating Corporate Governance are Clause 49 of the Listing Agreement with the Stock Exchanges in terms of Securities Contracts {Regulation} Act 1956 which is in existence since January 2006 and the recently enacted Companies Act 2013 which is now being implemented in phases. These have set up a systematic observance of best practices of Corporate Governance.
• The query is why did the Corporate Governance movement start in the first place? There is a very good reason. One should not overlook the fact that many of the corporate have been governed in the past and in the present too, in a manner which at several times defies the concept of good governance. The moot questions that can be raised, now, are that consequent to such Laws, at ground levels, whether it is complied fully or partially or whether it is complied only in form and not in substance?
IS CORPORATE GOVERNANCE CIRCUMVENTED AT BOARD LEVEL?
• One may take the example the meetings of Board of Directors {in short, Board}. The Board is the apex managing body of the company consisting of individuals having its genesis on the legal position that a company is an artificial and a juridical person which do not have any mind or body of its own and which cannot function without any human agency. {Refer case: Lennard’s Carrying Co vs. Asiatic Petroleum Co., {1915} AC 705 at 713}.
• The company law envisages as well as the Corporate Governance provisions stipulate that all important proposals for decisions of a company are placed before the Board to enable the directors collectively to discuss and consider the matter in all seriousness and take decisions. Section 179 of the Companies Act 2013 stipulates to this effect. This section provides in effect that the Board shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do except those that are to be exercised or done by the company in general meeting. The section further specifies the powers to be exercised by the Board on behalf of the company. This means that the powers of the Board are in parity and in co -existence with that of the company itself, however with the few exceptions built- in. Thus the position of the Board in management of the company may be diluted where it is unable to act. It was held in the case of Viswanathan v Tiffins B A And P Ltd., AIR 1963 Mad 520 that where the Board has become incompetent to act for some valid reason, the majority of the members may exercise the powers vested in the Board. Such incompetent situation may arise where all the directors are interested in a transaction.
• The Board, in spite of certain limitations, is the supreme body of governance, which needs to function in tune with the highest echelon of Corporate Governance. But any insider of the corporate may admit privately that many of the critical decisions are taken outside the Board meetings and not therein. And who takes them? Possibly the promoter or a person in that position or a person in the highest echelon of management! For sake of brevity he may be called, “the top management”. Thus, bringing the matter before the Board is just a formality. What actually happens is that the non-promoter directors or the independent directors look at the top management to guide them as to what exactly the decision would be with virtually no contrary opinion of their own. The top management, who could be holding the position of managing director or chairman, or may not even be a member of the Board but nevertheless could be attending the Board meeting as a non director - chief executive or otherwise, would give his views which would be endorsed by the Board - a mere formality. In reality it is not the Board which has taken the decision but the top management.
ARE INDEPENDENT DIRECTORS NOT IN TUNE WITH CORPORATE GOVERNANCE?
• Then one may come to the matters of independent directors who are envisaged to play critical role in the new dispensation of good governance of their companies. They bring in valuable, external, independent and objective judgements, views and opinions to the Board, raise important questions on the functioning of the company and seek appropriate answers. They are presumed to keep the management vigilant and make them follow the best governance practices in the interest of the company and act in the public interest. They are thus directors who will function without prejudice and partiality with no link to anybody, much less the promoters and will truly be working for the best interest of the company as envisaged in all company legislations. They will bring the best practices in the corporate world and be the panacea to all governance ills of companies.
• No doubt, all these may constitute a utopian concept but in practice have many pitfalls, however, that has not deterred the laws and practices to move towards this concept which the World is doing. The subject of Independent Director has been deliberated, from time to time, by many high powered expert committees appointed by the Government, industry bodies, professional institutions etc., in the context of corporate governance. There has been wide acceptance of this concept, nationally and internationally. In India this concept has found place in the listing agreement with stock exchanges. Clause 49 of the Listing Agreement has already provided for appointment of independent directors on the board of directors of listed companies. The Companies Act 1956 which is being phased out by Companies Act 2013 did not provide for this concept, but that has now been provided in great detail in the new Act of 2013.
• But how effective has been the presence of Independent Directors on the ground level? It may be erroneous to think that he is really independent in all cases. It is a well known position that an individual who has joined as a director on the Board, whether independent or not, does so at the behest of and at the request of the top management. It is at the whims and fancies of such top management that the director continues to hold such position. If such independent director does not toe his line, most likely the director would be requested to quit his position. He may not like to do that. One can therefore understand what would be the psychology involved.
• Section 149 of the Companies Act 2013, for the first time, lays down the Code for Independent Directors and the Guidelines for their Professional Conduct in Schedule IV of that Act. One of the multiple roles of independent director is that he should satisfy himself on the integrity of financial information of the company, and, that the financial controls and the systems of risk management are robust and defensible. Here the role of the independent director would extend to closely dealing with the chief financial officer/ chief accounts officer/ head of accounts/ finance/ chief risk officer, if any, and Head of the internal audit/ control to enable access to relevant accounting/ financial documents and freedom to call for any explanation/ clarification that he may deem necessary. It would also be required that he has appropriate understanding of these subjects so as to play an effective role.
• These are very laudable provisions but in actual circumstances it is very well possible that the financial statements of a company which have to comply with section 129 of the Companies Act 2013 to give a true and fair view of the state of affairs of the company, and, to comply with the accounting standards under section 133 of the Act of 2013 do not meet with these requirements. In some cases it may so happen that the accounts are manipulated or window dressed with the result that true and fair view of the state of affairs is only an illusion.
• The independent director, in many instances, may not be able to gauge the extent of the malaise as he is only shown the final outcome of the financial statements and he has virtually no means to check the detailed transactions or book entries which happened in backrooms. In many cases he may have some doubt but he is made to convince that issues are in order or he may just decide to gloss over the irregularities. Although the responsibility of such irregularity falls on the entire Board and the officers in default including the statutory auditors, the fact remains that the authenticity of the accounts of many companies may have to be accepted with pinch of salt. Hence the actions of the Independent Director will be contrary to the Corporate Governance, whether wittingly or unwittingly.
ARE BOARD MEETINGS DEFYING CORPORATE GOVERNANCE?
• The Board meeting process which assumes such importance in the corporate management is also not free of doubt. Section 173 of the Companies Act 2013 provides for Board meetings. This section provides that every company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation and hold a minimum number of four meetings of its Board of Directors every year. In terms of the new Act, the participation of directors in a meeting of the Board may be either in person or through video conferencing or such other audio visual means. It also provides that a notice of the meeting of the Board shall be given to every director at his address registered with the company at least seven days before the meeting.
• In the background of these detailed legal provisions, the fact is that, in actual practice, many times there may be only a perfunctory Board meeting or no meeting is actually held but shown in paper, by way of minutes, of having being held with the tacit concurrence of the directors. Notice is also prepared by way of record and given an appropriate date which is prior to the date of the meeting.
• With respect to preparing the minutes of the meetings of the Board and others, there is section 118 of the Companies Act 2013 stipulating to the effect that every company shall prepare, sign and keep minutes of proceedings of every general meeting, including the meeting called by the requisitionists and all proceedings of meeting of any class of share holders or creditors or Board of Directors or committee of the Board and also resolution passed by postal ballot within thirty days of the conclusion of every such meeting concerned. The Secretarial Standards on Board meeting and minutes issued by The Institute of Company Secretaries of India which have received legal backing in terms of this section 118 clearly and in detail have laid down the process involved.
• The legal position of the minutes needs no elaboration. It was held in the case of Killick Nixon Ltd., vs. Dhanraj Mills {P} Ltd., {1983} 54 Comp Cas. 432 { Bom} that so long the as the minutes are not challenged it is presumed that what is stated in the minutes is correct. In the case of B Sivaraman vs. Egmore Benefit Society Ltd {1992} 75 Com Cas {198} Mad it was held that the onus of proof to dislodge the presumption that minutes are evidence of proceedings recorded therein is on the person who challenges. Hence sanctity of the minutes is protected by law as prima facie evidence of proceedings which took place in the meeting.
• With this legal back ground what actually happens may be revealing and appalling. In many instances, Board minutes prepared for perfunctory meetings or in absence of actual meetings are approved by the top management and thereafter signed by the Chairman of the meeting. Other directors may have no information, inclination or say in the matter.
• It may also occur that a director who is not able to attend the meeting requests the top management to mark his attendance and show in the minutes as having attended. The only thing he has to do is to sign the attendance register sent to him after the meeting and take his sitting fees and other payments.
• It may so happen that many directors may not be at all aware of contents of the minutes till considerable period when the actions on the decisions recorded in the minutes would have already been taken.
• It may be possible that certain matters are recorded in the minutes at a much later stage or changes are made therein. Reopening of the signed minutes is also a distinct likelihood.
• The procedure followed by many companies of getting the minutes confirmed at the next Board meeting and signed by chairman of that meeting does not essentially change the position. The professionals involved in the process may not be in a position to prevent this state of affairs.
DISCLOSURES BEFORE BOARD MOCK CORPORATE GOVERNANCE?
• Another area of concern is in respect of various information which is required to be placed before the Board. These were meagre in the earlier days but have become more detailed as per the prevailing Laws. Clause 49 of the Listing Agreement with regard to corporate governance has laid down comprehensively the information and documents to be placed before the Board meetings. The following list, which has statutory force under Securities Contracts {Regulation} Act 1956, is onerous, but one may be surprised to know how many corporate deals with this vital information and disclosure in proper perspective and in the spirit of Corporate Governance.
• Some examples could highlight the issues:-
Annual operating plans and budgets and any updates to be placed before Board:-
The plans & budgets for the financial years do get prepared by many companies and placed before the Board on a regular basis. However, where subsequent implementation of such planned documents is concerned, there may be numerous positive or negative variations which, especially the negative factors may not come accurately before the Board, for ostensible reasons. Hence the updates or the follow up actions generally get camouflaged and thus reported to the Board.
Quarterly results for the Company and its operating divisions or business segments to be placed before Board:-
The preparation of these results and getting them audited or subject them to limited review by the statutory auditors in terms of Clause 41 of the listing agreement may appear in compliance of the provisions of the, Listing agreement, Companies Act 1956 or Companies Act 2013, however, the inherent window dressings of accounts and other manipulations of the entries and accounting standards cannot be ruled out.
Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc: to be placed before Board-
Only when these non compliances are so significant that they are in the public domain that they are compelled to be brought before the Board, otherwise these may be avoided to be disclosed.
• From the foregoing it is clear that the management may generally try to avoid bringing significant information before the Board. Only when the requirements are statutory that they are forced to be brought before the Board, that too, with as less information as possible. Even when adequate disclosures are made to the Board, one may ask the question as to how many directors bother to read attentively the contents of the documents presented to them. On numerous occasions the company deliberately gives substantial number of pages, at the last minute, just at the time of the Board meeting to ensure that the director does not get sufficient time to read and understand and contribute on the matters written in these papers. Many a time, some director may like to object to such procedure but he may be overruled by the general consensus that everything is fine. On many occasions, the nominee director of institutions, wherever present, would like to inculcate a sense of propriety in the process but again he may be in the minority and not getting support of his fellow directors. Even institution's insistence may not amount to much. In the end he may just fall in line and go along with the general trend. Meaningful discussions at the Board, it appears, are discouraged many times and the top management may generally request the director, in advance, who may have some issues to raise, to discuss with him outside the Board. At the meeting, he is therefore a mute spectator. Thus In fact, there could be conscious decision to make the Board functioning just a mere formality
• One should, consequently not forget that what documents show and what actually happens in corporate may not be the same. There could be compliance of all aspects of Corporate Governance, but in reality things could be quite different. Nobody would like to really speak out about these things as it is a best known and well kept open secret.
CHANGING SCENARIO- REASONS FOR HOPE
The above undesirable situation is definitely not all pervasive. There are good number of companies in India which follow the Corporate Governance in letter and spirit. However, those which do not so follow seem to be changing in tune with the general awareness of Corporate Governance and Laws, but that looks to be slow. To change the matters, the mindset of the corporate should change. Professionals in the corporate level, who are intricately involved in the process, should discourage this practice to the best of their abilities. It would be better if the Law gives them some protection to give sufficient courage to speak out. But at the end of the day, it should be hammered in the senses that a better Corporate Governance is not only a matter of good, systematic and ethical process but a matter of better business and higher profits.
AMITAV GANGULY
CAclubindia
