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Good governance in corporates is essential for globalisation, say experts

Amberish K Diwanji in New Delhi

Had corporate governance and public governance existed in Southeast Asia, then the economic crisis that occurred two years ago could well have been avoided, says Ronnie Chan, chairman of Hang Lung Development Company, Hong Kong. “If India wants to ensure that a crisis of the same proportion never occurs here, and if Indian companies want to be globally competitive in the new millennium, then good governance is a must.”

Ronnie Chan was in New Delhi recently to take part in the India Economic Summit, organised jointly by the World Economic Forum, Davos, Switzerland, and the Confederation of Indian Industry, New Delhi.

Chan's views were shared by WEF managing director Claude Smajda, Godrej and Boyce chairman Jamshyd Godrej, CII president and Bajaj Auto chairman Rahul Bajaj and many others.

Chan categorically blames the East Asian crisis on “two-and-a-half factors”. The two were the lack of public governance and corporate governance, while the half was speculation. “Speculation is half a factor because if in the first place, proper laws existed to ensure public and corporate governance, then speculators would never have had such a free hand as they did,” he says, adding, “Singapore suffered the least because it has good governance rules in place.”

Public governance involves setting up of regulatory bodies and a legal framework, the establishment of institutions that ensured transparency. “Rule of law and a proper financial system are essential,” he says.

According to the Hong Kong-based businessman, the first requirement of corporate governance is professional management. He pointed out that even in family-owned companies, which was the norm in India and where family members often held the highest offices in companies, it was imperative that such family members are professionally qualified and competent for the office they hold.

Citing the example of Hong Kong, he said, “In Hong Kong, 90 per cent of the companies are controlled by single families. But they are all professionally managed,” he said.

He said that all such companies have proper regulations and have family members in key positions, but all of who are qualified.

The CII, Rahul Bajaj says, had prepared a ‘Corporate Governance Code’ and it was up to companies to adopt it or not. However, Chan insists that few companies will voluntarily adopt such codes and hence the government must regulate their adoption. “The government can enforce corporate governance through institutions. The government must take the lead in this regard, otherwise only about five per cent of businessmen will comply with any such code.”

According to Chan, the East Asian crisis was marked by unethical practices: one Indonesian banker had lent 90 per cent of the bank’s money to companies owned by himself!

If the government fails to enforce governance codes, then businessmen must themselves take the initiative out of self-discipline. “It will be best if the private sector companies and the public sector enterprises act together in this regard,” he says.

But if the government or public sector enterprises are not interested, even then the private sector companies must adopt global corporate governance standards. The reasons are simple. “Globalisation demands good corporate governance,” he says.

In fact, Chan warns Indian companies not to globalise until good governance rules were in place, otherwise India would go the East Asian way. “In East Asia, all the good work built up over ten years and more was destroyed in a matter of weeks, simply because the necessary framework was not there.”

Agrees Bajaj. "If Indian companies wanted to globalise, they must adopt good corporate governance standards."

Godrej points out that one reason why Indian infotech companies were able to raise funds in the markets abroad, such as Nasdaq, was because they had adopted global corporate governance standards that satisfied the American investors. “Is it any wonder today that India’s largest infotech company is the second largest Indian company in terms of market capitalisation?” he points out.

Another area of concern was the lack of independent auditors. Smajda categorically states that in the present times, it was imperative to have independent auditors who were reputed and above board. Godrej points out that due to the distrust in Indian auditors, most of the multinational companies in India had insisted that the parent company’s auditor would also audit the subsidiary companies in India, often at much higher costs.

Smadja says one of the problems with corporate governance is the fact that different regions had different economic philosophies. “In the US, the only concern is increasing the shareholders’ value, in continental Europe it is creating employment, while in Japan the companies worked in tandem with the government as per the national strategy. Thus, it is very difficult to have a universal governance code, but there are minimum standards that all companies worldwide can and must adopt,” he said.

The CII Corporate Governance Code, Bajaj discloses, was prepared on the request of the World Bank.."All CII member companies should adopt it. We are now preparing the code for the implementation stage, and a committee under Infosys chairman Narayan Murthy will oversee the same,” he said.

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