“Most companies recruit their family members or friends as independent directors”, said Prashant Saran, Whole-time Member, SEBI (Securities and Exchange Board of India). He added, “Most of these independent directors have no information about the company and the only meager information which they have is provided by the management. We need to appoint directors who have knowledge and are duty-bound to watch the interests of the company as a whole.” Independent directors carry important responsibilities toward all the stakeholders, particularly towards minority shareholders.
Mr Saran was speaking at a well-attended seminar on ‘Corporate Governance and Investor Awareness’ hosted by Bombay Stock Exchange (BSE) on 15th June in Mumbai. Among the speakers included David Gerald, Founder, CEO & President, Securities Investors Association (Singapore); Kishor Chaukar, Managing Director, Tata Industries; Siddarth Shah, Director of Bank of India Shareholding Ltd and Chairman of BSE Brokers Forum and NL Bhatia, President, Investor Education & Welfare Association (IEWA).
Corporate governance refers to the set of systems and principles by which a company is governed, added Mr Chaukar. These systems provide guidelines as to how the company can be directed so that it can achieve profitability and growth without hampering the interest of all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society.
Mr Chaukar highlighted, “Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making necessary disclosures and decisions, complying with laws, accountability towards stakeholders and conduct business in an ethical manner.”Corporate governance is essential for a company to understand the difference between what are personal and corporate funds while managing a company.
People invest money in corporation and must be aware about the activities of the company. Every company should have proper risk management and ensure that equitable returns are provided to each shareholder, pointed out Mr Chaukar. For this, shareholders need to put pressure on the company to give their due returns. Shareholders should not let controlling authorities do what they like. Shareholders should ask hard facts and not rest till they get them.
Mr Chaukar, “Among the things which we must look for in a company are good culture, leadership qualities, good alignment within the organisation, strong structure of the organisation, openness and transparency.”
Mr Saran elaborated on the four key theories of corporate governance—Agency theory, institution theory, stakeholder theory and resource dependence theory. He explained the merits and demerits of each theory. In the 19th century, shareholders were limited and most of them lived in London. But now, the number of shareholders is over a million and they live around the world. Hence to communicate with them, we need to have something called electronic town halls where millions of people can be connected at one time, highlighted Mr Saran.
“Independent directors should be interdependent and not independent,” said Mr Gerald. Good corporate governance is the only right way to protect the interest of shareholders. Founded in 1999, Securities Investors Association (Singapore) operates as an organised investor lobby group in Asia. A non-profit organisation, SIAS promotes investor education, corporate governance and transparency in Singapore.
Mr Gerald said, at SIAS we resolve issues in ‘board room’ and not ‘court room’ in a win-win situation. He also pointed out a few cases studies where SIAS voiced investors concerns with the company and resolved them. He gave the example of companies like Natsteel Holdings, Yellow Pages, Isetan and China Aviation Oil, where SIAS played a lead role and helped investors resolve their issues.
Shareholders must attend corporate meetings and raise their concerns with decorum and reasonable voice. They need to organise them in such a way that the company board will work with them. We need to avoid crisis, added Mr Gerald.
On the other hand, companies should also communicate with shareholders such as through websites and newspapers. These days, social media such as Facebook and Twitter play a powerful role to communicate with shareholders. Investor relations should be given top priority.