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Adopt corporate governance as a way of life — Malegam

By Our Special Correspondent

CHENNAI, JAN. 10. Issues involved in corporate governance are no different from those involved in a `functioning democracy' and hence proper governance of companies should be treated as a way of life, Y. H. Malegam, who headed many official committees on capital market regulation, said here today.

Delivering the fourth Palkhivala Memorial Lecture under the auspices of the Nani Palkhivala Foundation, Mr. Malegam said that `in the ultimate analysis', corporate governance involved issues such as efficient and honest handling of public assets handed over to managements, truthful communication to stakeholders, respecting the rights of individual shareholders and refraining from oppression of the minority shareholders by the majority. Thus corporate governance ought not to be considered involving mere compliance with the letter of the law but should be adopted as a way of life, he said.

Mr. Malegam (who is Managing Partner of S. B. Bilimoria, a leading accounting and consulting firm) pointed out that the issue of corporate governance had arisen the world over in the wake of internal and external pressures on companies. Among internal pressures was the advice of financial analysts, which put fear in managements that unless they showed results in terms of profits and dividends, the companies would suffer by way of a fall in their share price in the market, fall in market capitalisation (namely, aggregate market value of shares) and erosion of the companies' ability to borrow.

The wrongful response of managements by way of shoring up the companies' bottomlines through creative accounting (namely, showing non-existing profits) led to unreliability of financial statements and sudden failures of companies. This in turn led to counter-pressures for corporate governance being exerted by institutional investors, who were increasingly dominating the capital deployed in companies and had ever larger stake in the proper functioning of companies. The institutional investors, including foreign institutional investors (FIIs) commanding huge funds, were so powerful that they could even force companies to follow the governance codes evolved by the FIIs themselves. Referring to the recommendations of various expert committees in the U.S., the U.K., Canada and the OECD (Organisation for Economic Cooperation and Development) on corporate governance, Mr. Malegam said India's recent initiatives included the reports of the Kumaramangalam Birla committee and the N. R. Narayana Murthy committee. He said it was not enough to create top-level structures such as independent directors and audit committees. The recommendation of expert committees to facilitate the process of `whistle blowing' by employees should be implemented. Mechanisms should be created to enable employees to alert top management and the board about wrong-doing within the organisation and for company-wide communication about the availability of such a mechanism, besides ensuring that whistle-blowers were not victimised.

Failure of corporate governance affected not only the companies concerned, be it Enron, or WorldCom or Parmalat, and their stakeholders but entire systems and economies. It undermined public confidence in institutions.

The South East Asian crisis of the Nineties too was the result of absence of corporate governance in financial institutions and absence of mechanisms for whistle-blowing. Corporate governance was equally important for family-owned companies to free them from problems connected with succession, he added.

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