Corporate governance is a system of rules, practices, and processes by which a company is directed and controlled.
Civil servant, educationist, corporate leader, institution builder, and management guru – Dr Arun Kumar Rath, IAS, Jharkhand cadre, 1973 batch officer has been a trailblazer who always dared to do different things — never done before — throughout his illustrious career spanning over three decades. As Secretary, Education, Govt. of India, Dr. Rath (M.Sc. Physics, Ph.D Business Administration and D.Litt.) was the key architect behind the Right to Education Act 2009. Before that, he left an indelible mark as the Secretary, Ministry of Human Resource Development, Additional Secretary (Steel) and Joint Secretary (Public Enterprises), Govt. of India.
After superannuation from IAS, Dr. Rath discovered his love for teaching and started his academic career as the Dean and Professor at, MDI Gurgaon. He served as the Chairman of the Indian Institute of Public Administration, Odisha Regional Branch at Bhubaneswar and is currently Chairman, DAV Public School, Pokhariput and Chairman, School of Business Management Bhubaneswar. He has also served as the Director on the Boards of several Blue-Chip Indian Companies in the Steel, Coal and Petroleum sectors. He received the award of Fellow of the World Academy of Productivity Science, Montreal in February 2020 for significant contribution to productivity and Lok Nayak Jay Prakash Narayan National Award in 2021 for outstanding contribution to education and the distinguished Paul H Appleby Award for outstanding contribution to public administration in 2022. Dr. Rath is a Distinguished Fellow of the Institute of Directors and a Fellow of the All India Management Association, New Delhi.
He has also authored several books on management subjects including Corporate Governance in the 21st Century, and Towards Better Corporate Governance: Independent Directors in the Boardroom. These are indispensable resources for academics, policymakers, and anyone involved in the field of Corporate Governance and CSR. Excerpts from an exclusive interview with Taazakhabar News.
How do you view the evolution of corporate governance norms in India over the last two decades?
Corporate governance has been triggered by scams and scandals in major companies and economies around the world. The subject has evolved in significant ways in India over the last two decades. From the historical perspective, the need for effective corporate governance was felt after the economic liberalisation in India in 1991. Due to the opening of the Indian economy, there was a substantial growth of new companies in the last decade of the twentieth century. Many fake companies came up which mopped up funds from shareholders and vanished.
India introduced major corporate regulations to deal with fraudulent companies, in line with the new corporate governance laws. However, there was a great deal of delay due to the slow process of reforms in our system.
The Satyam scam (2009) expedited the reform process in India. A new Companies Act was enacted by the Parliament in 2013 replacing the old Act of 1956. SEBI also introduced new Listing Obligations & Disclosure Requirements (LODR) in 2015. Both these instruments are world-class as they incorporate the best principles and practices from different global sources.
The Companies Act, 2013 introduced several reforms. In your view, what were the most transformative aspects?
Companies Act 2013 introduced several reforms in the corporate governance framework of India. These provisions were introduced keeping in view the global codes of corporate governance like the Cadbury code (UK 1992), SOX Act (USA 2022), and OECD guidelines of corporate governance (Paris 2024). In addition to these legal systems, the Indian Reports of various SEBI Committees like Kumar Mangalam Birla Committee (1999), Narayan Murty Committee (2003) and Naresh Chandra Committee, J J Irani Committee (2005) were incorporated into the draft of the new law.
The Indian regulator SEBI revised their regulations for listed Indian companies and introduced new listing standards (Listing Obligations & Disclosure Requirements-LODR) in 2015 for eligibility of companies to be listed in the Indian stock exchanges. Even after such modernisation in both the legal frameworks, SEBI went one step further by appointing an expert Committee under the chairmanship of Uday Kotak to study and recommend the desirability of separation of the posts of Chairman & CEO in Indian companies. These initiatives introduced far-reaching reforms in the Indian system of corporate governance.
Some of the major provisions include a decision by SEBI to separate the posts of Chairman and CEO in the Board of listed companies. Now the Board of a listed company will have a part-time non-executive chairman and a full-time CEO/Managing Director. The Board will have half to one-third outside Independent Directors. The Independent Directors will play a key role in the Boardroom and Board sub-committees including the Audit Committee. Every board will have at least one woman Director to ensure gender diversity. An Independent Director must be changed after five years.
Further, the independent audit must be ensured by creating an independent Audit Committee to be chaired by an Independent Director and with two-thirds of members being outside independent Directors. The statutory auditor must be changed in five years. An auditor can do no other work except audit in the same company. Every Director must be evaluated by the Board while he is absent.
Section 166 of the Indian Companies Act fixed the duties and responsibilities of Directors with penal provisions for violations
Sec 135 of the Act made it mandatory for every eligible company to spend at least 2% of profit on CSR on activities as listed in Schedule 7.
Board independence is the hallmark of good corporate governance. The board must make objective and informed decisions to promote the interests of the shareholders and other stakeholders.
Independent audits will ensure better financial discipline in Indian companies to protect shareholders’ funds. Conflict of interest and related party transactions must be strictly scrutinised to prevent abuse of authority by the top management.
What structural changes are needed to ensure that independent directors function freely in Indian boardrooms?
Independent Directors can play a crucial role due to their pre-eminent position in the Boardroom, provided they remain objective and are committed to safeguarding the long-term goals of the company.
The Independent Directors must be selected with no conflicts of interest with the company, which is the basic requirement. They must be independent of both the promoters and the management. They must be eminent professionals who can bring their rich expertise and experience to the deliberations in the boardroom. They must be effective in the Audit Committee and question wrong management decisions and any financial irregularity by the top executives of the company.
All Independent Directors must meet, without management as per the requirement of SEBI regulations, and recommend to the Board to deliberate on any agenda or action point that the management may avoid due to vested interests.
The Board Chairman, CEO and CFO must create a healthy environment in the company, particularly the Boardroom to enable positive contributions by the Independent Directors for better corporate governance.
The Independent Directors being outsiders must receive training about the specific company and its operations and future strategies to contribute effectively to the boardroom. They must prepare well for the board meetings and the AGM. They should not only participate in all the meetings but also offer their constructive suggestions for the future of the company.
Independent Directors must be the conscience-keepers for the company and should contribute effectively to the board deliberations, based upon their vast expertise and experience without any bias or subjectivity in guiding the boardroom.
India often struggles with the implementation of good policies. What, in your view, are the biggest hurdles to effective policy execution in India?
In the last two decades, we in India have created world-class frameworks of law and regulations for corporate governance as well as other areas of governance across different domains. However, the litmus test lies in the effectiveness of their implementation. There are various reasons for such a mismatch between policy and implementation.
We are often soft in approach which stops or delays effective implementation in a time-bound manner. The process of implementation is often slow and time-consuming. Often the affected parties or the law violators easily avail of the opportunities available in the legal process and file appeals before higher authorities. There is a huge pendency of disputes with no early settlements.
The laws must be implemented both in letter and spirit. Many situations require ethical and honest conduct by all concerned. Often the authorities ignore questions of fairness, transparency and trust which are issues beyond the law.
Values are often forgotten. Ethics cannot be enforced like law but needs to be respected and obeyed even without any force of punishment. The social sanction against breach of ethical conduct should be effective. Social tolerance of wrongdoing gives license to the wrong-doers and violators.
How can the government strike a balance between ease of doing business and strict corporate governance enforcement?
Ease of doing business is enabled by minimum license raj and more self-regulation. An entrepreneur should not be subjected to unnecessary permissions and compliances. In the last few years, there has been a sea change in the archaic license permit and inspector raj which used to be high in India. Many laws and regulations of the colonial era have been abolished or modernised. Indian Companies Act, IPC, Cr PC and many such laws have been reformed to suit modern India. All laws and regulations cannot be abolished but should be reformed and minimised in a democracy. An entrepreneur who wants to set up a start-up should find the business environment in India conducive and encouraging which will promote new ventures. It is heartening to note that the Companies Act 2013 has made it simple to set up a new company by ease of registration in minimum time.
A civilized society should be based on self-regulation and values. Minimizing controls and unnecessary regulations by India began with the Policy of Economic Liberalisation in 1991. In the last decade, there have been significant initiatives and corrective steps by the government which have created a much more conducive environment for the promotion of new ventures and business entities in India. Ease of business in India has gone up and should improve further in the coming years.
Do you think regulatory bodies like SEBI and MCA are adequately empowered and resourced to enforce governance norms?
Regulatory bodies like MCA and SEBI have been adequately empowered to enforce the governance norms. Our strategy has been to create clear regulations and allow the entities to follow the norms without hurdles unnecessary interpretations or interferences. The approach should be to provide an environment of ease of doing business.
At the same time, if an entity deliberately breaks the law and regulations, it should be possible to deal with such violators without any delay. In this regard, the concerned law-enforcing authorities, including MCA SEBI and others, should be effective in law enforcement in a time-bound manner without fear or favour, so that the system works meaningfully and systematically. Any soft approach or delays will only add to the erosion of public confidence in the empowered authorities.
How can boards of directors be made more accountable and transparent in both private and public sectors?
Boards must be accountable, responsible and transparent, subject to the needs of business confidentiality.
In addition to compliance with the laws and regulations. Indian companies, both public and private, must respect business ethics and values in their business dealings. “Corporate fairness, transparency and accountability are hallmarks of good corporate governance” (James D. Wolfensohn 1998). Research has revealed that well-governed companies are preferred by shareholders and stakeholders for investment. As per research findings “Socially responsible companies outperform their less fastidious peers on the stock market” (The Economist New York 2000).
SEBI Committee on Corporate Governance chaired by N R Narayan Murthy (2003) stated, “Corporate governance is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company”.
As such ethical conduct, accountability and transparency are hallmarks of good corporate governance.
These objectives can be achieved by the selection of Chairman, Directors and Independent Directors who have no conflict of interest with the interests of the company. They should participate in objective and independent decision-making in the boardroom without any personal bias or motive. They should be honest trustees of the shareholders and stakeholders.
The Board of Directors should be committed to the healthy growth of the company’s business and should safeguard the interests of the shareholders and promote policies that are conducive to social good and environmental conservation in line with the Sustainable Development Goals.
Long-term value creation should be the corporate objective instead of pursuing short-term goals of earning profit by adopting reckless methods and unethical means.
The distinction between private and public companies as well as MNCs registered in India should gradually disappear. All are registered under the Indian Companies Act with all the provisions of the law applying to them. All companies in India should be national companies promoting the idea of Vikshit Bharat @2047.
What are the most common governance challenges Indian public sector undertakings face, and how can these be addressed through policy or structural reforms?
The PSUs in India have vast potential for growth and contribution to the Indian economy. They need autonomy and empowerment. Economic liberalisation in 1991 saw the withdrawal of financial support to the PSUs from the budget of government, but the enterprises did not get the required independence from non-interference by the government. The PSUs do not enjoy a level playing field with the private sector enterprises.
The most common governance challenges faced by Indian PSUs include lack of autonomy, interference by the Ministries of the government in the process of decision-making and lack of transparency in the process of selection of Directors and Independent Directors for the boardroom. It is imperative to introduce the following reform initiatives by the government as the majority owner:
The government as the majority owner of the PSUs must establish a clear and consistent ownership policy with their role as the owner defined clearly.
The government must allow full functional autonomy to the Boards of public enterprises and not interfere in the day-to-day management of the enterprises/
The enterprises should not be asked to perform duties not mandated by laws or regulations
The government should dilute its shareholding from 100 % to a level of 75% or below by offering the shares to the public, mutual funds and financial institutions. This will unleash the vast potential locked up in public enterprises and insulate PSUs from unnecessary interference in decision-making
The government should declare a negative list of items and activities, like administrative, strategic or commercial matters, over which there will be full autonomy of the Board to decide without any interference.
The Boards of the public enterprises should consist of competent, capable and experienced Independent Directors who can make informed decisions in the boardroom in the best interests of the public enterprises.
The Boards of public enterprises should maintain an arms-length distance from the government.
Directors should act with integrity and be held accountable for their actions. The Board should assess their performance.
Independent Directors should attend Board meetings regularly and spend sufficient time asking questions to elicit critical information from the management in the boardroom for effective decision-making.
The Board should strive towards continued value addition to the public enterprise and ensure its long-term sustainability. The Board should adopt and follow a risk management plan and prepare a succession plan for senior executives to avoid inordinate delays in hiring senior executives at crucial positions.
