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1.
The government has made a notable signal through the budget
speech, to restructure and strengthen the central public
sector undertakings (PSUs) system with promises of further
investment by way of equity and credits. This move is
indeed refreshing compared to the predictable response
that has been evident in many countries during the last
two decades, of dismantling and narrowing public ownership
of assets, in one manner or the other, at the very ring
of economic reform. Such responses have had a strong undercurrent
of faith in widening and deepening the capital markets
through increased domestic participation as well as higher
international capital flows. Over the last two decades,
India’s approach has been mostly cautious, if not experimenting,
in fully subscribing to the popular currents in market-centric
economic thinking.
2.
Over the years, academicians have noted the structural
issues inherent to public enterprises such as control
by public representatives, accountability to the Parliament
for public funds invested through the budget mechanism
and the status of employees as civil servants. Several
motivational factors have also been adduced such as the
agency problem and creative rent-seeking conditions in
the realm of government ownership that affects efficiency
of capital and also the shareholder value. These structural
and motivational “deficiencies” have actually become the
rationale for privatization of public assets wherever
possible. While early studies have indicated the efficiency
and validity of these arguments, there have been some
later studies, which prove that despite such possible
infirmities, public enterprises could indeed add good
shareholder value and contribute to capital efficiency.
Due to the lack of conclusive proof, the arguments have
become more intuitive and assertive, depending on one’s
ideological dispositions. Without arguing one way or the
other, it is important to note that the opportunity that
has remained unexploited fully is to arrive at alternative
mechanisms or by simply giving up some types of controls/superintendence,
which may mitigate the infirmities.
3. Corporate governance framework can be a useful template
for discovering such alternatives and more appropriate
processes. However, there has been relatively lesser attention
in the world to the corporate governance system of the
public enterprises, though the private sector has benefited
from it substantially in recent years. The assumption,
arising from the unrestrained faith in the capital markets,
has been that all commercial assets will, or should, indeed
be in the hands of the private sector and the public.
Consequently, the principles of corporate governance evolved
by the Organisation for Economic Cooperation and Development
(OECD) and now accepted as global standard, do not explicitly
acknowledge the issues of government ownership. Corporate
governance, in this sense, has assumed a symbiotic relationship
with capital market development and dispersed private
ownership. The main assumption behind public enterprises
in the international context is that they are closely
held by the government and its agencies; that they are
inaccessible to investors as they would not be publicly
traded; that they enjoy monopolistic markets.
4.
Contrarily, Indian PSUs have a few distinctive features
that makes the country stand apart from many developed
ones. First, several of the public enterprises in India
are publicly listed and actively traded with thousands
of individual investors owning shares along side the government
(Italy and Germany could be exceptions). Secondly, government
ownership of assets dominates both in the manufacturing
as well as the banking sector. Thirdly, the market capitalization
of the public enterprises as a proportion of total mark
cap (estimated at about 32% of BSE) is probably among
the highest in the world. Fourthly, the recent events
show that several of our public enterprises are not only
dominating the Indian scene but have become important
players in the global markets for mining, oil, gas, earthmoving,
steel, banking, engineering, heavy electricals, etc. competing
with Fotune-500 MNCs.
5.
Just as in the case of private enterprises that do not
have well-diversified ownership, public enterprises may
also have issues of ownership concentration and control.
However, an important difference is that in the case of
the public enterprises, the representatives of the dominant
owner are only fiduciaries with relatively short tenures
that could hamper accountability. In both cases, the structure
and practice of monitoring, control, and superintendence
appear to go beyond the typical corporate governance mechanisms,
to direct control over management. Some may argue that
this indeed is desirable in reducing the agency problem,
except that it normally is accompanied by abusive self-dealing
and related party transactions that adversely affect the
rights of other shareholders.
6.
The main mechanisms for corporate governance which support
democratic principles are the board, the shareholders’
meetings, auditing, accounting, disclosure, and reporting
(see Diagram-1 for a comprehensive depiction). Short-shrift
of these mechanisms and attendant control over management
do not contribute to the pillars of corporate governance
ie., (a) transparency (b) accountability (c) responsibility,
and (d) fairness, which are accepted by multilateral institutions.
7.
Many of the special controls in the case of the public
enterprises may have arisen from the requirement of exercising
superintendence over public monies to ensure probity,
efficiency, and effectiveness. The same framework used
in the case of the sovereign function of the State continue
to be used in the case of the public undertakings as well.
This, probably has to do with the history of public enterprises
having emanated as extended arms of the ministries, along
with supporting legal provisions and even, judicial pronouncements
(such as the one relating to the applicability of Article
12 of the Constitution). However, the profile of the public
enterprises today are different in their characteristics
and mission than at the time of the Industrial Policy
Resolution, 1956 and the initial Five Year Plans. The
assumption behind the Industrial Policy Statement of 1991
and later announcements relating to public enterprises
outline a new paradigm – public enterprises now appear
much less as instruments of dirigisme to promote undefined
“welfare” and more as economic agents in pursuit of maximizing
the residual incomes and shareholder value. In that sense,
several of the mechanisms of superintendence over PSUs
and legal dispensations could be construed as additional
levy on the transaction cost apart from potential contradiction
with the accepted principles of corporate governance which
support democratic values.
8.
Corporate governance has, especially during the last seven
years or so, assumed the status of a global movement.
New institutional mechanisms including codes, principles,
best practices, and standards have come to shape thinking
at the Board as well as public policy levels. Arising
from the principles stated by the OECD and the Commonwealth
Association of Corporate Governance (CACG), laws, regulatory
mechanisms, stock exchange rules, accounting and secretarial
standards have been reformed throughout the world. There
is new faith in the corporate governance principles that
they would evoke investor premium, lead to sustainable
competitive advantage and result in higher economic efficiencies.
Most corporates throughout the world are making conscious
distinction between ownership and control; empowering
the Boards and making them increasingly independent; improving
their systems of risk management, accounting, reporting,
and disclosures; engaging stakeholders more intently and
respecting the rights of shareholders to participate,
question, vote and influence. There is new language generated
from corporate governance theory and writings that is
pervading the corporate scene.
9.
Though there is no uniformity in the definitions of corporate
governance, there is an evident convergence on what it
comprises of. The principles brought out by the CACG have
been adopted by most commonwealth countries as appropriate
and inclusive. The OECD principles were brought out in
1999 and revised in April 2004. They have been endorsed
by the Global Financial Stability Forum as one of the
12 key standards for sound financial systems. They underpin
the corporate governance component of World Bank/International
Monetary Fund (IMF) Reports on the Observance of Standards
and Codes (ROSC). It implies that adherence to these principles
is an important factor for financing, investments and
capital flows. The ROSC has been tracking the corporate
governance systems in different countries and hosting
the results on the website for public view. India figures
favourably on most of the macro factors of corporate governance
implied in the OECD principles. These are also being used
by Standard & Poors in their corporate governance
rating services. They relate to (a) legal infrastructure,
(b) regulation, (c) information infrastructure, and (d)
market infrastructure. At the firm level, the criteria
relate to ownership structure (transparency of ownership
structure and concentration and influence of ownership);
financial stakeholders’ relations (regularity of, access
to, information to shareholders meetings; voting and shareholders’
meetings procedures; ownership rights); financial transparency
and information disclosure (quality and content of public
disclosure; timing of, and access to, public disclosure;
and independence and standing of the company’s auditor);
board structures and processes (board structure and composition;
role and effectiveness of Board; role and independence
of outside director; directors and executives compensation,
evaluation and succession policies).
10.
The existing structures and processes of relationships
between public enterprises and the representatives of
the dominant shareholders could hamper the assessment
/ ratings on some counts. For instance, the criteria in
rating the concentration and influence of ownership demands
that “if large block holders exist, these should not exert
influence that is detrimental to the interest of other
stakeholders. Minority shareholders should be protected
against loss of value or dilution of their interest (e.g.
through capital increases, from which some shareholders
are excluded or through transfer pricing with connected
companies), concentration of economic interest and influence
of controlling shareholders of the parent/holding company
on independent/board management action should not occur
through block holdings of key operating subsidiaries and
through effective control of key customers and suppliers”.
In addition, the criteria relating to financial stakeholder’s
relation closely examines the equality of access of information
to all the shareholders, whereas the practice has been
that the dominant shareholder not only is privy to more
information than other shareholders but is intimately
involved in the management. Close scrutiny of the processes
would reveal that the influence, control, and directives
from the dominant shareholders over the management and
the board are not transparent nor disclosed. Further,
corporate governance principles demand that every director
owes his first duty to the company as a legal entity and
that all information arising in a company shall remain
the property of the company alone. Information passed
on exclusively to dominant shareholders, whether a private
individual or the government, is not favoured. Similarly,
the OECD principles as well as the criteria of rating
agencies look closely at the Board structure and composition,
its effectiveness, the role of independent directors,
compensation, evaluation, and succession policies. The
main idea behind these principles and criteria of evaluation
is to ensure that the board is truly independent of management
or a particular owner, and that it is active, empowered
and competent. The powers outside the scope of the Board
of Directors are to be exercised at the shareholders meetings
as per the articles of association and the law in force.
The powers of the responsible Ministry and Parliament
are mainly to oversee and complement these mechanisms
than to substitute, pre-empt or override.
11.
Despite these developments, the public enterprise system
remained insulated from the corporate governance tide
in the initial years. A major reason is that in most countries,
public enterprises are fully owned by the government and
only a negligible number have mixed ownership structures
of government as well as the public. Despite this profile,
governments in several countries have lately recognized
the need to comprehend the corporate governance principles
fully and restructure/reform the mechanisms of government
monitoring, control and superintendence. At the same time,
there is recognition that where public funds are deployed
and budget provisions are made, public accountability
arises as a natural consequence and warrants continued
parliamentary oversight, Ministerial responsibility, and
government auditing. Progressive countries have attempted
to refine, codify, and reform these processes so that
the principles of corporate governance, which promise
sustainable futures and increased shareholder value, are
ingrained to the extent possible.
12.
For instance, New Zealand has a system by which director
appointments, contracts, compensation, and evaluation
are independently processed by a separate organization,
the Crown Company Monitoring and Advisory Unit (CCMAU)
instead of the responsible ministry. The CCMAU has a detailed
process of Board profiling, director profiling, skill
/ candidate profiling, evaluation, succession planning
etc., Similarly, the Canadian government has issued corporate
governance guidelines for the Crown Corporations which
sets in place the independence and importance of Boards
of directors including their renewal, and evaluation.
The effort of the Australian government in this regard
is primarily to describe the relationships system of the
public enterprises and to record the powers, duties, and
responsibilities of various bodies, in particular the
board of directors. It recognizes that “an effective governance
framework must start with the powers, roles and responsibilities
of the relevant ministry, board and CEO being clearly
defined. Without such definition, clear accountability
for the achievement of the objectives cannot be achieved”.
This sentiment is reiterated in the OECD document as well
in the context of multiple domains: “….there is a risk
that the variety of legal influences may cause unintentional
overlaps and even conflicts, which may frustrate the ability
to pursue key corporate governance objectives. It is important
that policy makers are aware of this risk and take measures
to limit it”. The Australian National Audit Office has
brought out comprehensive discussion papers and documents
that codify relationships, duties and responsibilities
of directors, parliament, ministers, etc (“Corporate Governance
in Commonwealth Authorities and Companies” and “Applying
Corporate Governance Principles to Budget Funded Public
Service Agencies”). Similar reform and capacity building
exercises by systematic documents, best practice guidelines,
conventions, director’s checklist, and training have been
reported in other countries also such as Canada. Similarly,
in the USA, some of the public enterprises which have
been competing alongside private enterprises have embraced
corporate governance principles on a competitive footing.
Illustratively, in the case of Fannie Mae, the President
had this year reportedly declined to nominate Directors
preferring that shareholders must elect them. It was complimented
as a positive development since last year, thus pushing
up its corporate governance standing dramatically in the
market. Needless to state, market places a premium for
corporate governance and it is probably the simplest way
of “talking up” the share.
13.
The above may provoke a question whether PSUs, in the
new paradigm, have given up their “public” orientation
in favour of “enterprise”. In the early decades after
Independence, “commanding heights” and “model employer”
were the terms/cliché that captured the entire
vision for the public enterprises. Over the years, there
have been three notable developments that have probably
forced public enterprises to reposition their thinking
to affirm shareholder value and sustainable competitiveness.
The first has been the fiscal strain on the economy which
eroded budget provisioning for the public enterprises
for several years and on the other hand, forced government
to dilute its holding in several companies. Second, is
the public listing and trading in several of the companies
by which the shareholder value in the capital market became
an important parameter of performance. Third, is the competition
with the private sector and the MNCs in the domestic as
well as international markets which may have forced public
enterprises to look closely at their cost structures,
product positioning, and marketing strategies, thus, inducing
a commercially competitive spirit. Progressive democracies
(Canada and Australia for example) have found an answer
to the tension by enjoining the responsible Ministry,
Boards, and managements to articulate the public policy/community
service obligations and have them formally approved without
scope for undue discretions. Despite these international
developments, it is not uncommon in India to announce
special dispensations, directed mergers, acquisitions,
take-over, strategic investments, community oriented projects
and the like.
14.
The complaint of several employees and managements in
the public enterprises has been that they are forced to
address social issues and undertake activities which may
hamper their profitability. The argument probably should
not be construed as counter to the values of corporate
citizenship and corporate social responsibility. Indeed,
the private sector has been taking great initiatives in
public - private partnerships as well as Corporate Social
Responsibility (CSR) projects such as those relating to
child labour. They also have improved their reporting
mechanisms (triple bottom line) as well as accreditation
for social action (such as SA-8000). Such corporations
have allocated budgets for these apparently non-commercial
activities primarily as they see a long-term convergence
of interests between such actions and sustainable shareholder
value. Public enterprises definitely would not grudge
this. However, the issue at heart might be related to
the directives of the representatives of the dominant
shareholder i.e. the government, than as initiatives of
the management/Board, in the garb of affirmative action,
distributive justice, and “welfare”. Elected representatives
and the public officials are indeed acknowledged experts
and judges of what constitutes welfare. While motives
can be attributed to every administrative directive, it
will not be in the knowledge or capability of the employees
or the management to judge or argue over such actions.
But, they clearly fall into the realm of corporate governance
at the board and in some cases, the shareholders meeting,
where they must be formally tabled, discussed and reasoned
transparently. There should be mechanisms by which enterprises
are forced to debate transparently, directives/choices
that diminish the shareholder value or the long-term sustainable
advantage for a public enterprise. For instance, a forced
takeover of a sick company or a product line or a dictated
pricing formula or control would impinge on the shareholder
value. Prevention of strategic investments / joint ventures/alliances
must also follow the same regimen of corporate governance
process. While the dominant shareholder will have its
rights in pursuing it’s thinking, these have to be clearly
through the authority of the board, which hopefully is
independent, and participative/inclusive shareholder meetings.
15.
Simultaneously, public enterprises should be prepared
to sacrifice potential budgetary support, and price preference
mechanisms in the long run. The reason for this statement
is not that public enterprises do not deserve special
treatment from the government but that there are two countervailing
arguments. One is that the public enterprises should continue
to argue for restructuring their governance framework
so that the relationship with various agencies and the
ministry are truly objective, arm’s length, and equitable
- subsidy or other favoured treatments by the dominant
shareholders only reinforces the logic for greater control
and superintendence over the management of the public
assets than their independence. Secondly, there is convergence
around the world of bringing about greater transparency
in budgets, tariffs, subsidies, and prices. For instance,
the IMF’s transparency codes will probably demand more
transparent budgetary provisions and accounting; objectivity
in reporting; robustness of statistics and public accessibility
of information.
16.
The Central Vigilance Commission (CVC), the Public Enterprises
Selection Board (PESB), the Department of Public Enterprises
(DPE), the Standing Conference for Public Enterprises
(SCOPE) as well as a few other agencies have been debating
the need for the reform of corporate governance mechanisms
in respect of the public enterprises, albeit, at different
points in time and in different contexts. Of these attempts,
the concept of “navratna” companies and induction of independent
directors has been an important and laudable first step.
The SCOPE has been pioneering the cause of strengthening
the corporate governance mechanisms right from 1997 when
it commissioned us to develop a discussion paper, which
was debated. A later document titled “First Principles
of Corporate Governance for Public Enterprises in India”
prepared at the initiation of SCOPE also gives a series
of recommendations for reforming the Government-PSU interface
and strengthening the governance mechanisms in the public
enterprises (see Annexure-1). More recently, arising from
the efforts of the SCOPE and the commendably proactive
stand of the CVC, a report has been submitted, that has
given several recommendations by which vigilance administration
can be strengthened in the PSUs with greater delegation
and empowerment of the Board (please see Annexure-2 for
excerpts). A related effort, albeit unfortunately aborted,
is the policy debate we initiated on employee stock option
plans for the Navratna PSUs, wherein one of the objectives
was to align the top management’s remuneration with shareholder
value and performance, as is now being commended by the
OECD principles.
17.
Many of the international attempts so far have been to
bring about greater autonomy to the Boards; greater objectivity
in appointments, review and reappointments; greater financial
and strategic powers to the Board and the shareholders’
meetings; and the like. In some cases, existing laws have
also been amended to bring about the necessary facilitative
conditions without forsaking public accountability. The
superintendence and oversight from special agencies and
institutions have been restricted to the truly strategic
and regulatory levels with planned frequency. The efforts
also have been to bring about greater transparency and
accountability without undue space for interpretations,
discretions, and discriminations. These moves support
the pillars of corporate governance and the globally recognized
standards of best practices which the private sector benefits
from.
18.
In the case of India too, several academicians and public
enterprise observers have been advocating the need for
appointing truly independent directors who are fit, proper,
and competent. The latest missive from the Prime Minister
himself affirms the dire need in this respect. There are
lessons to be drawn from the experience of New Zealand’s
CCMAU, which is responsible for profiling the Boards,
profiling the skills, canvassing for data, interviewing,
selecting, and renewing the contracts. Performance review,
reappointments, and extensions by such a mechanism, which
will have wider powers than currently vested with PESB,
will ensure not only objectivity but an arm’s length relationship
with the dominant shareholder whose representatives may
not necessarily be accountable for failures in carrying
out their fiduciary responsibilities. Such a body could
also be responsible for recommending the board compensation
and related policies, with the Board being fully empowered
to take decisions on operational issues. In this context,
approvals of directors` foreign travel by the dominant
shareholder would stand out prominently for adverse comments
from the international corporate governance community.
19.
Where the strategic/business plans have been approved
by the Parliament and the responsible ministry and the
Parliament, international practice is that the Board is
empowered to pursue the investments, joint ventures and
the like with the formal approval at the Shareholders
meeting where necessary. International practice also is
to have contracts/MoU with the responsible minister as
part of the Strategic plan/budgeting process with periodic
reviews. This arrangement is meant to preclude control
over operational matters and not to compound them. In
reforming the structures, procedures, and controls, a
distinction is advisable among management, governance,
and superintendence. Governance is required to be distinctly
above management to enable it to challenge strategic options,
risk management procedures, internal controls, and the
like to ensure sustainability of the corporation, protection
of shareholders’ wealth and its growth while keeping the
values, vision, and culture firmly in view. Superintendence
over such governance must be even higher in terms of the
macro economic rationale for pursuing the mission; ensuring
that the systems and controls are appropriate to furthering
probity amongst employees; and that the mechanisms assure
the government of accuracy in accounting and reporting.
It is for this reason that in some countries while the
statutory auditors are appointed by the government auditing
body and are fully under its control and accountability,
further audits are reportedly once in five years or so
for checking the “value-for-money” criteria or bringing
about sectoral reports - there are no other transaction/
concurrent /annual reports. It would be worthy to note
that the parliamentary superintendence in some countries
is mostly limited to approving the public policy, strategic
plans and budget provisions and not for dealing with any
of the operating matters, which are made “out-of-bounds”
by convention. Remuneration, including the stock options,
are also mostly within the Board, and shareholder meetings
where required, reckoning factors pertinent to the industry,
competition, strategy and profitability than gross approaches
in the form of guidelines and instructions.
20.
In conclusion, it may now be opportune
and timely for the government to constitute a high level
committee and bring out an implementable set of reforms
in the coordinating, monitoring, controlling and regulating
laws, agencies, structures and processes in the light
of the international developments in corporate governance
and suiting the new challenges of PSUs. This will truly
be a major step in meeting the global standards and expectations
of the markets apart from strengthening the PSU system
and its performance, which the government cherishes.
Annexure-1
The First Principles of Corporate Governance
For Public Enterprises in India
(Source: Yaga Consulting Pvt. Ltd., 2001, www.yagaconsulting.com)
4.0. THE FIRST PRINCIPLES:
4.1.
The government, should review the legal status
of all organisations controlled by it so as to separate
those which can carry out commercial activities as companies
following the market discipline and those that will continue
as a sovereign function of the government.
Statutory bodies, Commissionerates, Directorates, Departmental
Undertakings, Co-operatives and Trusts may be reviewed
and given the opportunity of becoming companies under
the company law without any ambiguity regarding their
character, purpose or legal status.
4.2. The government should draw up a consensus
based comprehensive policy of privatization, of both companies
and other entities, delineating those, which will continue
to be State-owned, the method of disengagement and the
process of disengagement.
An approach has been attempted in a limited way by
segregating “core and non-core” and “strategic” enterprises,
though the criteria are not evident. The efforts of the
Disinvestment Commission and the Department of Disinvestment
in this direction are noteworthy. However, these need
to be deepened and broadened so as to cover all issues
pertaining to all the public enterprises and evolve a
political consensus. The valuation methods, processes
of valuation, choosing the method of disengagement, tendering/bidding
and sale/selection of bidders have been contentious in
most countries including India. These can be resolved
through consensus and transparency, breaking away from
the case-by-case approach.
4.3. The government should issue guidelines, policy
or directives indicating the contingent conditions under
which alone a currently private sector activity will be
brought under State-control.
This measure may limit the extent of moral hazard
and the use of golden-share type of mechanisms. If a company/activity
fails, there are numerous arguments and pressures to invoke
the States’ support which obviously results in foregoing
of other socially advantageous opportunities. Room for
such pressures need to be foreclosed to the extent feasible.
4.4. The continued ambiguity in the set of objectives
of public enterprises should be resolved by the government,
highlighting the primacy of financial objectives within
a framework of product - market targets, and other values/social
commitments.
Despite years of debate and directions, the ambiguity
continues in both policy statements as well as actions.
Consequently, public enterprises often have confusion
on their market segments, value-delivery, levels and extent
of social responsibility. A clear policy statement by
the government will bring about the essential difference
between the non-negotiable explicit financial objectives/priorities
and the set of values and preferences inherent in the
mission of the organisation, whether explicit or implicit.
4.5. The government should bring about greater
transparency by fully accounting for subsidies and price
controls imposed on public enterprises, and achieving
the desired social and development objectives through
governments` budgetary provisions and related mechanisms.
In the case of Banks, such a measure would apply to
directed social lending and in the case of insurance,
the special schemes. In the case of electricity companies,
it relates to free or concessional supplies to specified
sectors and groups. These measures will ensure that true
costs and prices are apparent in the books and transparent
to all stakeholders. Social/human development objectives,
which require investments must be met through direct budgeting,
direct subsidies to the target group and long-term contracts
between the government and the public enterprise. Such
an approach will make the social objectives more transparent,
more efficient and also allow the public enterprises and
the governments to move towards the global standards in
fiscal transparency, accounting standards and public disclosure
practices. This measure will also remove the dogging confusion
on the objectives of public enterprises.
4.6. The government should give up direct control
over public enterprises by restructuring/rationalising
the role of departments overseeing these undertakings.
Government should arrange to exercise its superintendence
through the Governing Board and the General Meetings.
The current administrative control will become redundant
if a special agency/body is used for exercising the ownership
rights of the Government, as recommended in 4.10 below.
On the other hand, if there were any regulatory role for
the ministry/department, the same would also need review
in the context of the current perspectives on the independence
of regulatory bodies from that of ownership. In either
situation, redundant oversight may breed a false of legitimacy
for inefficient control mechanisms and may also create
special constituencies for drawing unjustifiable benefits.
4.7. The government must separate its ownership role and
let public corporations be governed by the same structure
of controls as that of any other company. The laws giving
special status to public enterprises or special controls
over them must be amended / annulled.
In the case of central public sector undertakings, amendments
would be required in the company law to remove the special
status for a government company; revisiting the interpretation
of the applicability of Article 12 of the Constitution
to the employees of public enterprises; removal of the
jurisdiction of Comptroller and Audit General, Central
Vigilance Commission and the Central Bureau of Investigation.
In the case of public sector banks, the role of the Reserve
Bank of India must be restricted to being a regulator.
In keeping with good principles of corporate governance
and the several recommendations made already in this connection,
the RBI must discontinue the practice of having its nominees
on the boards of the banks it supervises and approving
board appointments and must divest its equity stake in
Banks. Similar actions would be required in the case of
Ports, Railways, electricity companies, government controlled
Co-operatives and a host of other public enterprises.
4.8. Parliamentary/Legislative Assembly control over public
enterprises should be limited to interaction with the
body exercising the ownership rights of the Government.
Currently, government ownership implies the right
of the Parliament over even the operating matters of PEs.
Managers in the PEs find this as a special control that
the private sector does not suffer from. It is advisable
that the Parliament/Assembly deals with those exercising
the ownership rights on behalf of the Government (say,
Trustees or members of a Commission, as the case may be).
4.9. The government should assess and re-capitalise
the public enterprises to ensure that the cost of social
burden on a historical basis is made good on a one-time
basis after adjustment for special grants and concessions
given, if any.
This will help some of the public enterprises in mitigating
the net burden or lagged effect of non-commercial objectives
and directed activities and progressing towards greater
transparency and competitiveness.
4.10. Ownership rights of the Government should
be exercised by specialised bodies to be created for that
purpose.
These special bodies / agencies can be Trusts or Commissions,
which alone should deal with the public enterprises as
an owner. These may be both at the State and the Centre
levels. The Government should transfer all the shares
/ ownership rights to such special bodies. These special
bodies should comprise of independent professionals with
good experience of carrying out fiduciary responsibilities.
These bodies may, as in the case of several countries,
use special intermediaries (service providing companies)
for actively monitoring, evaluating, contesting, and proxy
voting on their behalf, if so required. Exercise of ownership
rights may include disinvestments, privatisation, acquisition
of equity, reinvestment, portfolio management, JVs, M&As
and the like which are typically associated with ownership
rights that can be exercised through the Board and the
share-holder meetings.
4.11. The body exercising the voting rights should actively
structure, create, develop and renew the governing board
ensuring highest qualities of leadership, enterprise,
integrity and judgement.
The body must be staffed with professionals who are well
trained in law, finance and general management. The body
should build data and knowledge of various standards,
situations, board dynamics, the internal processes of
briefing, de-briefing, monitoring and evaluation. It should
have sound mechanisms of managing the performance of its
representative/nominees.
4.12. Governments must ensure that persons who are or
were members of parliament or legislative assemblies be
excluded from occupying positions of chairman or members
of the governing board of a public enterprise, thus extending
the spirit followed in the case of central public undertakings.
This is to ensure that public representation, which is
a function of the practice of vote maximisation, and nurturing
of constituencies, does not contradict the pursuit of
transparent sustainable objectives of the enterprise.
4.13. The position profile and specifications of chairman,
chief executive and members of the governing boards should
be approved by the governing board and shareholders in
advance and through the expert advice of external bodies.
This will ensure that people do not chase board slots
and jockey for a position. It will also help in debating
and structuring the Board with the requisite competencies
required to steer the organisation well into the future.
Periodic amendments and exceptions may be needed. However,
these amendments should pass through the board and the
shareholders. Such a system will help in curtailing the
scope for “cronyism”.
4.14. Listed public enterprises will have to follow
the mandatory requirements of the Company Law and the
stock exchange regulations. All other public enterprises
should follow the relevant CACG or OECD principles that
would foster independence, integrity, transparency and
accountability, of the governing board, protect the rights
of shareholders and engage the stakeholders.
There is increased compulsion now for listed companies
to induct independent directors, create an audit committee,
have a separate section in the annual reports on corporate
governance compliance; a section on management discussion
and analysis, better disclosures and board practices.
Public enterprises other than the listed corporates are
not under any obligation to improve the quality of transparency
and accountability. As a first step, they may adopt the
international guidelines and list in their reports the
current state and further steps contemplated vis-à-vis
each of such principles/guidelines. These public enterprises
may give a short report as to how the structure, systems
and processes of the governing board will meet the principles/guidelines
and the spirit behind them.
4.15. Each public enterprise should develop a
best practice manual for board processes, procedures and
formats which may include, inter-alia, the profile of
board positions; recruitment, selection, induction, training
processes; conduct of board meetings; dealing with conflict
of interests, disclosures, accounting and reporting requirements;
evaluating board members; remuneration and renomination.
The best practice manual will be helpful in lessening
the scope for poor governance and, progressing to meet
international standards. There will be fewer omissions
and, hopefully, there will be some control over commissions
of unethical/inappropriate actions.
4.16. Public enterprises should ensure that individuals
chosen for appointment as directors are either properly
accredited, when such facility is available, or be formally
trained in corporate governance practice.
The major challenge in progressing quickly on good governance
is the dearth of competence in directorial functioning.
Most directors do not have the essential knowledge on
relevant law; duties, responsibilities and liabilities;
financial analysis; strategy; business ethics and effective
decision-making. It is necessary to build capacity throughout
the country by an accreditation process, training and
development. Directorship must develop, eventually, as
a profession with a sound body of knowledge. A director
must be recognised because of such knowledge and the associated
competence than the position itself. Several countries
including the UK, Australia and New Zealand have set excellent
examples for director training and accreditation.
Annexure-2
EXTRACTS
FROM PANDE COMMITTEE REPORT ON STRENGTHENING VIGILANCE
IN PSU`S,
Source: CVC`S WEBISTE
(Members
of the Committee: Mr.Arvind Pande, Prof.Y R K Reddy, Mr.
M.A Pathan, Dr.R.K.D Shah, Prof.Vinayashil Gautam, Mr.S.Gopal)
Recommendations
5.1
It is recommended that the CVC considers a repositioning
exercise as far as the PSEs are concerned to create a
high-powered wing that can set standards, evaluate, and
assist adherence to these standards, introduce rating
systems and announce the same, establish benchmarking
within the country and in collaboration with other countries,
and build capacity in the entire PSE system to upgrade
the quality of their structures, systems, and processes
in vigilance administration.
5.2
It is recommended that the CVC and the PSEs adopt an approach
of capacity building that can integrate better with the
modern day requirements of risk management, security management,
and financial controls and compliance. This effort will
add discernable value to the competitiveness of the enterprise
apart from promoting, probity, and integrity amongst public
officials and, supporting, synergizing and fostering corporate
governance.
5.3
It is recommended that the CVC’s PSE wing expands and
intensifies its proactive role and achieves even greater
depth and coverage.
5.4
It is recommended that the coverage of CVC’s jurisdiction
be restricted to E-8, E-9, and directors of all companies.
This will ensure parity going by the pay scales of Schedule-D
companies’ directors and the E-8. However, the CVC may
make specific exemptions in the case of select navaratnas,
which have in place internal systems, controls, and procedures
that would demonstrably meet the preset standards evolved
by the CVC. In case of such exceptions, the CVC’s jurisdiction
may be restricted to the director level only. However,
it is recommended that this empowerment should be earned
by the respective organizations by meeting quality standards
and subject to withdrawal should the systems fall short
of the standards in future.
5.5
It is recommended that anonymous and pseudonymous complaints
forwarded by honourable MPs or MLAs should be authenticated
by the concerned CVO or official. Where the complainant
is identifiable suggest to the MP or MLA concerned to
obtain his/her signature and name in their own interest,
failing which the case may be proceeded as if the honourable
MP or MLA is the complainant.
5.6
It is recommended that the CVC gives firm guidelines to
the companies to initiate proceedings under the relevant
sections of the IPC and the CrPC in all cases of false,
malicious, vexatious, and unfounded complaints that may
have delayed strategic decisions.
5.7
It is recommended that the CVC amends and issues a fresh
order to ensure that specific elements are stated under
“scrutiny of antecedents” and state clearly that no fresh
complaints will be entertained after the vigilance clearance
has been given for Board interviews/appointments unless
a specific charge sheet has been issued.
5.8
It is recommended that the vigilance clearance is simplified
in the case of PSE employees aspiring for Board appointments.
The CVO concerned should be empowered to verify the records,
make enquiries, and furnish the assessment without countrywide
scrutinies through various CBI offices. Unless otherwise
required for any apprehended reason, it is recommended
that a period of 10 years should be the time span for
verification.
5.9
It is recommended that the order dated 23-04-04 on the
definition of vigilance angle is further amended in the
case of PSEs considering the following suggestion:
“Vigilance
angle is obvious in the following acts:
(i)
Demanding and/or accepting gratification or offering and/or
giving gratification other than legal remuneration in
respect of an official act or for using his influence
with any other official.
(ii)
Obtaining a property, movable or immovable, whose value
is beyond the company’s norm, without consideration or
with inadequate consideration from a person or an organization
with whom he/she has or likely to have official dealings
or his/her subordinates have official dealings or for
whose benefit he/she can exert influence over decisions.
(iii)
Obtaining for himself/herself or for any other person
any valuable object or property or pecuniary advantage
by corrupt or illegal means or by abusing his/her position
as a public servant.
(iv)
Possession of assets disproportionate to his/her declared
and known sources of inheritance and income.
(v)
Misappropriation, forgery, or cheating or other offences
that attract the provisions of CrPC/IPC.
Gross
or willful negligence, reckless decision making; blatant
violation of systems and procedures; misapplication or
non-application of laid down professional codes/standards;
exercise of discretion without appropriate reasoning of
the exigencies or the public interest; attempts to conceal
information on major exceptions, deviations, omissions
and commissions, are some of the acts where the disciplinary
authority with the help of the CVO should carefully study
the case and weigh the circumstances to come to a conclusion
whether there is reasonable ground to doubt the integrity
of the officer concerned.
If
the integrity is not in doubt but the act amounts to a
misconduct or indiscipline, the same must be dealt with
appropriately as per the disciplinary procedures of the
company.”
5.10
It is recommended that the CVC’s PSE wing gives it views,
advice, and recommendations in one go and more selectively
rather than at different stages of several cases. It is
recommended that the CVC refrains from giving advice of
a minor nature leaving it to the disciplinary authority
concerned.
5.11
It is recommended that the CVC makes a difference between
the advice that is left to the company to follow or otherwise
and directives that must be followed – some cases indicate
that companies have ignored major suggestions from the
CVC with impunity and hence such a distinction would be
appropriate for further action.
5.12
It is recommended that no vigilance case be initiated
against any individual just prior to the retirement and
those in progress must be closed within a year’s time.
The CVC may also give a general guidance that no action
under the PC Act be initiated against officers after two
years of his/her retirement.
5.13
It is recommended that the employees of the PSEs who are
equivalent in rank to that of the designated public servants
for seeking prior sanction from the ministry before initiating
prosecution, be treated on par with the latter as PSEs
are treated as government and its employees as public
servants.
5.14
It is recommended that the CVC develops scientific criteria
for the selection of CVOs that match the competency requirements.
5.15 It is recommended that the CVOs are trained longer
and more frequently and given adequate knowledge of management
audit, decision making processes, domain issues of particular
industries, good knowledge of financial analysis and transaction,
risk management, control systems, ability to coordinate
with other functions, etc.
5.16
It is recommended that CVC takes charge of the human resource
pool of CVOs by selecting people from other sources also
than merely the list suggested by the DOPT.
5.17
It is recommended that the role of the CVO in the ministry
is further elaborated and clarified to make the position
an effective intermediary and facilitator among the ministry,
the CVC, and the PSEs concerned.
5.18
It is recommended that an advisory group/panel is instituted
to assist CVC in applying specialist and technical knowledge
in understanding the circumstances, assumptions, and implications
of various actions, complaints and their processing.
5.19
It is recommended that CVC has an Ombudsman and a help
desk system to take up grievances of employees who may
be unduly harassed by prolonged cases or by public leaders;
it may examine whether the whistle blower protection system
can be combined with this role designated for the PSE
segment.
5.20
It is recommended that PSEs have a mix of internal and
external staff in their vigilance departments. The CVOs
themselves can be external. The CVC may consider promoting
a database of human resources on sectoral as well as functional
basis that can be used for filling vacancies in various
organizations.
5.21
It is recommended that the CVC designs a training and
certification system that can be a criteria for placement
into the vigilance system.
5.22
It is recommended that the CVC keeps close watch over
organizations, which have poor organizational designs
for vigilance, inadequate staffing or prolonged ad hoc
mechanisms, and intervenes proactively.
5.23
It is recommended that where there are subsidiary companies,
the vigilance of these must be under the vigilance administration
of the holding company and need not have direct interface
with the CVC.
5.24
The CVC may consider developing an expert group within
its system, full-time or as a panel to assist PSEs in
designing and implementing appropriate vigilance structures,
systems, and standards.
5.25
It is recommended that the CVC develops ideal/best practice
manuals for vigilance recognizing the factors behind the
success of vigilance departments in some of the companies.
The CVC must consider occupying the current vacuum in
devising standards, best practice manuals, developing
human resources, and building capacity amongst the public
enterprises to enable them meet CVC’s objectives of promoting
probity, integrity, transparency, and efficiency in the
management of public assets.
5.26 It is recommended that the CVC exercises restraint
in issuing circulars so that the PSEs apply themselves
more comprehensively and innovatively than adhering to
a few of these circulars which do not cover all aspects
of vigilance.
5.27
It is recommended that the CVC adopts a plan to develop
principles of vigilance and a structure/framework of best
practices; ensures that each PSE has a comprehensive manual;
undertakes vigilance audit, rating, ranking, and benchmarking,
and evolves a system of evaluation and assessment based
on strategic criteria than mere statistics.
5.28
It is recommended that a Board Sub-Committee supports
the vigilance function at the enterprise level with special
invitees as necessary to examine and render advice in
cases which need judgment and technical knowledge of a
high order.
5.29
It is recommended that in case of Board level officials,
before they are suspended, the Ministry should obtain
concurrence of the Advisory Committee as suggested in
para 3.3.30 and in case of other officials, the Board
Sub-Committee’s concurrence should be obtained before
suspending any officials.
Diagram-1
Modern corporations are disciplined by internal
and external factors
(Source: Corporate Governance Framework, Nadereh Chamlou,
Magdi Iskande, World Bank)
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