Corporate Governance Mechanism: A barometer of performance
Professionally managed firms suffer two key problems: (i) asymmetric information (ii) agency problem. Good corporate governance is essential to overcome these two problems. Many professional managers pursue their personal interest which becomes detrimental to investor’s interest. This gives birth to Agency Problem.
Invariably in any firm, CEO and Board members have more information than the investors. They tend to show a rosy picture to the investors and leverage on information asymmetry. A sound governance mechanism is essential to institutionally tackle these challenges which hold the potential to subtly hollow the whole company.
The Indian Scenario
The governance mechanism of two giants in India TATA and Infosys were recently under question. Both these groups have been the shining examples of corporate governance in the past. The unusual severance pay to the former CFO turned as a bone of contention at Infosys. This came to light in May 2016 when the company released its annual report while the CFO’s resignation had been announced in October 2015.
In general Indian firms are generally dominated by families and thus there is little room for an outsider to come and act decisively. This poses serious challenges to corporate governance mechanisms. India has largely borrowed American philosophy of Corporate in Companies Act. The notion of independent director and how things should be governed exist largely for namesake. Indians have promoter driven kind of mindset. Thus there is a fundamental contradiction where companies tend to show something and do something else.
Steps undertaken by the government
SEBI has constituted many committees on corporate governance like Birla committee, Narayan Murthy Committee and incorporated many recommendations. Based on the recommendations of Birla committee, a separate clause was incorporated in stock exchange listing agreements which ensures accountability of Board of Directors to shareholders, classification of independent and nominated directors, packages to attract young talent on the board among others.
Establishment of FPI regulation frameworks were taken by SEBI to improve financial markets. On the recommendation of Murthy committee, steps like bringing efficient rules and code of conduct, improving quality of financial disclosures, risk management have been put in place.