Vice-president M. Venkaiah Naidu has a SWEET recipe for improving corporate governance at Indian firms: Segregation of ownership and control; Wealth creation, of which profits will be a by-product; Efficiency of decision-making and resource use; Ethical and environmental commitments; and Transparency through accountability.
Speaking at the Mint Corporate Strategy Awards 2018 in Mumbai on Friday, Naidu said, “Corporate governance is a key element in improving economic efficiency and growth as well as enhancing investors’ confidence.” The theme of the awards was corporate governance.
The Mint Corporate Strategy Awards 2018 are the result of a year’s hard work. The awards have considered an elaborate methodology for identifying the most qualified companies in four categories, namely, Classical, Adaptive, Shaping and Renewal.
Naidu said that good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interest of the economy and shareholders and should facilitate effective monitoring. “Effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for proper functioning of a market economy.”
Observing that the economy saw a “temporary dip” in the last two quarters of 2016-17 and the first quarter of 2017-18 due to demonetization and disruptions relating to implementation of the goods and services tax, Naidu, quoting the World Bank, said economic activity began to stabilize from August last year and is expected to clock a growth rate of 6.7% this year.
“As the global economy is looking up, India should take advantage of global conditions to further spur growth. With India turning into an attractive destination for foreign investments and the government’s push to the manufacturing sector through the Make in India programme, it is believed that this sector has the potential to reach $1 trillion by 2025,” he said.
Naidu said that the government has taken many initiatives with a view to doubling the income of farmers by 2022. “One of the biggest challenges is to bridge the urban-rural divide and I feel that the corporate sector should play a bigger role in closing this gap, particularly in education, health and skill development sectors,” he said.
Noting that the government—through liberalization, digital revolution and reforms such as ease of doing business—has sought to cut down red tape and help promote the corporate sector’s growth, Naidu said that some unscrupulous individuals and firms are trying to misuse the system and indulge in fraudulent practices. “In recent times, corporate governance in India has been in the news for reasons more negative than positive. These episodes in my view are a kind of churning from which all the stakeholders of corporate governance need to draw the right lessons for transforming our corporate governance norms at par with the best in the world.”
“Of particular relevance is the relation between corporate governance practices and the increasingly international character of investment. International flows of capital enable companies to access financing from a much larger pool of investors. If the countries are to reap the full benefits of the global capital market and if they are to attract long-term capital, corporate governance arrangements must be credible, well understood across borders and adhere to internationally accepted principles,” Naidu said.
And even if corporations do not rely primarily on foreign sources of capital, adherence to good corporate governance practices will help improve the confidence of domestic investors, reduce the cost of capital, enable good functioning of financial markets and ultimately lead to more stable sources of finance, he added.
Naidu pointed out that India’s distinctive corporate governance issues originate from the high proportion of family-owned companies. “In our country, more than one-third of the companies are controlled by one or more family members in concert with one another. Most family-owned businesses are unable to discern that there lies a dichotomy between the business and the personal affairs of the family. Thus, decisions are often made to suit the family and are not necessarily in the best interest of the firm.”
He urged retail investors to take responsibility for corporate governance. “In our scenario, retail investors are more concerned about the material financial gains on their shareholdings instead of seeking to be active participants in influencing the affairs of the company.”
Other corporate governance issues Naidu highlighted include the need for succession planning, the implication of cross-holdings, ensuring risk management strategies and the board of directors acting as agents of shareholders instead of discharging their duties as a company’s fiduciaries.
“India is on the rise. For the new India to become a reality at the earliest, the corporate sector has an important role to play as a catalyst. We don’t have many corporations with a global presence. You need to reform, perform and transform so that Indian companies can open up new vistas of global opportunities which would in turn benefit our country and its people,” Naidu said. livemint