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Hony.
Editor |
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Dr.
Bindi Mehta
(Director,
Research at ICSI - CCRT, Formerly, Chief economist, CRISIL
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Commonwealth Association of Corporate Governance
(CACG) wins International Award.
The CACG, to which the Academy of Corporate Governance
(ACG) is affiliated, has received the prestigious 2003
Award from the International Corporate Governance Network
(ICGN). Commenting at the Awards ceremony in Amsterdam,
Stephen Davis the US based CG guru, (who is also a Senate
Member of the ACG) said “to paraphrase Churchill - never
in the history of corporate governance have so few done
so much for so many and here to receive the award is the
man that made it all happen". Rich tributes were
heaped on Geoffrey Bowes, the CEO and Michael Gillibrand
of Comsec for conceptualsing and leading this effort successfully.
The CACG shares this award with Dr William Crist, former
chairman of CalPERS, USA .
Members
of the ACG are thrilled with this global honor, as some
of them have been closely associated with the CACG and
the Commonwealth Programmes on Corporate Governance from
the early days since 1998. (see
the news item for further details/photographs).
Editor
(Any
views and opinions expressed by authors, writers in this
e-journal are of their own.
Corporate Governance Journal is not responsible for the
facts, figures, views, and statistics appear in this journal.)
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Vigilant
Shareholders, Vigilante Groups
by
Jayanthi
Iyengar
(The
author, a freelance writer, can be contacted at
Jayanthiiyengar1@yahoo.com)
(Published in Business Line, June 24, 2003)
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ON
JUNE 13, when public preoccupation was centred on Mr S.
K. Alagh's ouster from Britannia, a small drama took place
in the heart of Mumbai — Greenpeace activists stormed
Hindustan Lever's AGM using proxies gained from friendly
shareholders. They first "prepared" those present
on the possible fallout on their holdings if the former
employees of the now-closed unit at Kodaikanal (in Tamil
Nadu) sued the company for allegedly exposing them to
mercury contamination. They then grilled the HLL management
on the company's plan to remedy the damage done to environment,
health of the former workers and the community at large.
The
management presented its own defence, which Greenpeace
found inadequate. However, the object of this piece is
not the debate's outcome, but to raise some underlying
issues. Those who followed the capital market developments
in the mid-1990s will remember how shareholder activists
raised shindigs at AGMs or scuttled public issues by obtaining
stay orders from courts.
Some
shareholder activists were genuine. But a few plain blackmailers.
Companies initially bought peace by paying off the oppressors,
but the courts woke up to the possibility of blackmail
and stopped giving stays. They also threatened strictures
against those who wasted precious time on such litigation.
Since then, one has not heard much in this regard from
the shareholder protection societies.
Today,
sustainable development, corporate social responsibility
and socially responsible investment are words that have
come to stay in the corporate lexicon, and companies hoping
to survive cannot wish them away.
On
May 7, shareholders of Pepsi moved a unique resolution,
raising corporate social responsibility to hitherto unknown
levels. Two of its institutional shareholders, Mennonite
Mutual Aid (MMA) and MMA Praxis Mutual Funds, moved a
resolution seeking a report by October on how the company
proposed to deal with AIDS in sub-Saharan Africa. The
resolution could muster only 7.5 per cent support from
the shareholders present, and Pepsi was saved from having
to answer some embarrassing questions — how AIDS could
affect its sales and how it proposed to deal with a public
backlash, if any, for doing business in the AIDS belt.
Yet,
this development exemplifies things to come. Increasingly,
companies will have no choice but answer their vigilant
shareholders on newer issues, which may or may not have
a direct bearing on the company and its fortunes. Besides,
future investment decisions are also likely to be increasingly
dictated by religious, environmental-friendly and socially
responsible shareholders in search of ethical companies.
According
to media reports, in the first three months of this year
in the US over 200 funds have moved $185 million worth
of conventional mutual fund investments into ethically
and environmentally responsible companies. A similar trend
is bound to happen in India, when investors will no longer
be happy by mere lip service to sustainable development
and health concerns, but turn proactive enough to decide
whether they wish to draw their returns without remorse
from investments in liquor and tobacco. When that happens,
Indian companies, like their Western counterparts, will
have no choice but respect shareholder decisions and follow
good and ethical corporate practices.
However,
vigilante shareholder activism is another matter. It amounts
to outsider interference in what is essentially a business
relationship between the company and those who own it.
Vigilante activists groups have gone on to dictate the
manner in which business is done across the globe and
India, often to the detriment of both individual choices
and the larger good. After the Narmada, nobody dare think
of getting enmeshed in another large dam project and the
concomitant controversy. As the result, the benefits that
could have flowed to the economy through investments in
infrastructure projects have been denied to the people.
There
is also a constant demand that the child labour in glassmaking,
carpet making and beedi rolling be abolished through international
sanctions. In Alagh, Gujarat, the livelihood of over one
lakh workers employed in ship-breaking is threatened by
the provisions of the Basel Convention because the craft
in question may expose employees to hazardous chemicals.
Yet,
when all these discussions take place, nobody talks about
how these are stages of development that the rich countries
have already passed through.
Nobody
denies that child labour should be eradicated and steps
taken to handle toxins with care, as also rehabilitating
those who have been displaced due to mega projects. What
one does question is how these social issues become trade
issues, and how outsiders become powerful enough to force
choices on others.
It
is this kind of vigilante activism which must go. Let
the starving in Bihar and Orissa decide whether they wish
to die or eat genetically modified soya corn or potatoes,
instead of those who have a warm meal in their belly.
Of
course, such decision-making requires full disclosure.
In case of GM foods, it is labelling. In the case of HLL
and Pepsi, it would be providing adequate information
to the shareholders. But let none of these issues be hijacked
by outsiders, hampering global business.
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Banking
Sector Governance & Incentives –
A Note for Discussion
by
Prof YRK Reddy
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It
was in 1999 that we had strongly pleaded for a special
attention to the Banking and Finance sector. There was
some hesitancy and reluctance to acknowledge the special
need due to the prominence of the then released OECD
Principles, which were accepted as all inclusive. Lately,
multi-lateral organizations have begun to bestow special
attention to this sector. The idea note here carries
a theoretical model for Bank governance and raises some
issues that should be discussed in respect of providing
incentives for promoting good governance in this sector.
A. Bank Governance:
1. The quality of banking sector governance could be
a function of:
M x I x L x
R x S x B, where:
M Macro policy
environment;
I Strength
of institutions;
L Law
and enforcement arrangements;
R The quality,
independence, accountability, and transparency of regulation;
S Shareholding
patterns and the quality of activism that ensures equitable
control;
B Structure
processes and quality of Board of Directors
including their independence and strategic leadership
2.The
macro policy environment should reflect independence of
various governing bodies, their objectivity and transparency
in policy design and their implementation (there are possible
cues for this in IMFs Codes of Good Practices in Fiscal
and Monetary Policies and other “Governance” related literature).
Macro economic environment and/or macro economic policies
could have either positive or negative impact on banks’
governance.
3.
Institutional arrangements must ensure, inter alia,
information infrastructure and market infrastructure.
Information infrastructure may relate to accounting
principles, reporting and disclosure of mechanisms of
banks as well as the regulators (should the supervisors
disclose their reports arising from on-site/off-site
supervision; should banks share information and make
it public regarding defaulters?); disclosures regarding
compliance and reasoning for non-compliance with global
standards/Bank for International Settlements (BIS) norms/guidelines
such as those contained in Bank for International Settlement’s
Basle Committee of Banking Supervisors (BCBS) (the International
Forum of all banking regulators and supervision bodies)
“Enhancing Bank Transparency” and “Sound Practices for
Loan Accounting, Credit Risk Disclosure and Related
Matters” and “Framework for Internal Control Systems
in Banking Organizations”.
Market
infrastructure that will ensure effectively and functioning
capital markets including liquidity, transferability
of shares and ownership rights; markets for control
and availability of mechanisms for asset reconstruction,
debt recovery management systems, etc. (Does deposit
insurance hinder market discipline through moral hazard?)
It is apparent that there is increasing belief in the
market as a substitute even for regulation but it is
not clear as to the point of such a substitutability.
(Alan Greenspan has reportedly said “Supervisors
have little choice but to try to rely more – not less
– on market discipline”; Andrew Crockett echoed
“Regulation should try to respond to the realities
of the market, rather the other way round”.)
4.
Legal infrastructure refers to the existence of laws
and, more importantly, their timely enforcement in respect
of not only the shareholder rights but also creditor
rights, bankruptcy, contracts, property rights, human
rights, liquidation and restructuring, and special features
relevant to the banking sector as in the case of dishonored/creative
financial instruments, non-existing/under valued collaterals,
etc. In the case of developing countries, there are
existing Acts/Laws (such as the Banking Regulation Act,
1949 of India, State Bank of India Act, 1955 of India
etc.) that may have provisions in contravention to known
principles of good corporate governance.
5.
The quality, independence, accountability, and transparency
of regulation is probably the key difference in the
corporate governance framework of the banking sector
from the others. Regulation here refers to independence
of the regulatory authority from the executive (political
or bureaucratic), absence of regulatory overlap that
could provide for arbitrage, the quality of regulatory/supervisory
standards, norms, and practices vis-à-vis the
global practice/BIS, BCBS norms. Effective self regulatory
bodies within the sector (not only of company secretaries
or chartered accountants) would reinforce the regulatory
climate. (Though this is rare, the Academy of Corporate
Governance is helping the Non Banking Financial Institutions
and Urban Cooperative Banks sectors in India to form
Self Regulatory Organizations with encouragement from
the Reserve Bank of India.)
6.
The shareholding patterns themselves may not have as
much bearing on the quality of governance as their activism
and systems that would ensure that there is no hijacking
of control/management (which indeed is the case with
government controlled publicly listed banks in several
countries). The exercise of rights and activism will
ensure election of quality directors who are accountable
to all shareholders.
7.
Board structures that would have inbuilt mechanisms
for ensuring accuracy, transparency, and efficient risk
management processes; that have functioning audit committees,
ALM committees, risk management committees (covering
capital adequacy, credit risk, market risk, and operational
risks), remuneration and nomination committees; that
rely on a good framework for internal control that is
frequently reviewed and tested; that have robust processes
for Board selection, development, evaluation, and compensations;
and have Board Charters and Codes.
B.
Incentives:
1.
Incentives for good governance should be, derived
than induced. Incentives for establishing good
institutional, legal and regulatory arrangements in
any country are inherent in public policy design which
does not get subordinated to market discipline. These
arrangements are made on the basis of perceived benefits
(mostly public but often private) such as development
of capital markets, FDI flow, country ratings, surveillance
mechanisms, and potential conditionality. Should one
create incentive/disincentive structures to draw countries
to fall quickly in line? If the answer is yes, then
it would appear dirigisme than market mechanism that
should allow choice.
However, within the country, a structure of incentives
and disincentives can be provided both to Banks as well
as regulators by creating reputational instruments
and connected dissemination of information.
Rating, ranking, public disclosures on compliances and
non-compliances are one set of mechanisms that regulators
(banking and stock market) can promote for ensuring
good corporate governance.
2.
For regulators, a two level system can be thought of.
One: Inter-national rating and ranking on the basis
of a strongly validated model. Two:
At the micro-level, by the regulator for individuals
and teams of supervisors by giving incentives, both
extrinsic and intrinsic. (The risk of such an incentive
plan for individuals and teams, unless very carefully
structured, is that they may reward activity than effect.
There is need to align the validated model of the first
variety with the processes involved in the latter.)
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© 2001 Academy of Corporate Governance |
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