corporate governance challenges

In this blog post, Seuj Bikash, an Advocate, presently practising in the Gauhati High Court who is also currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes on the corporate governance of PSUs in India.

photograph Seuj Bikash

Introduction:

The Indian Economy is a mixed economy, and both the public sector and private sector are indispensable for the all round economic growth of the country. The private sector enterprises are primarily driven by profit motive, not by welfare purposes or public interest. Therefore, private business owners are not interested in setting up their businesses and investing in those areas of the economy which are very closely related to public interest, wherein massive capital investment is required, but profit obtained by such investment is either meagre or can be achieved after a long period. The Government directly takes part in the business activities in those sectors setting up the public sector undertakings or enterprises. The public sector undertakings (PSU) or Public Sector Enterprises are undertakings or enterprises owned by the Central Government or the State Government. The corporate governance of PSUs is not only managed but also funded by the Government (the Central or any State  Government) with a primary focus on public interest and balanced economic growth, wherein commercial, or business interest takes a secondary position.

 

Corporate governance of PSUs

The PSUs exist and operate in India in three forms, firstly, the Departmental Undertakings, such as, railways, postal services, Broadcast (Doordarshan and All India Radio), etc. which are under control of some ministry of the Government and financed and controlled by any other Government Department.

Secondly, the Statutory Public Corporations created by the Parliament or State Legislature by passing an Act which defines the powers, functions, management, organisational and administrative structures of such corporations, such as the Food Corporation of India, Life Insurance Corporation of India, etc.

Thirdly, the Government Companies also fall under the purview of PSU. A company is deemed to be a Government company or PSU if the Government holds 51 percent or more of its paid up capital. For example, Hindustan Machine Tools Limited, Steel Authority of India Limited, etc.

Various PSUs have been awarded additional financial autonomy. These companies are public sector enterprises which have been given comparative advantages, greater freedom to compete in the global market so as to “support” them in their drive to become global giants. By financial autonomy granted by Central Govt., the PSUs are categorised under three “Ratnas”, viz., Navaratnas, Maharatnas, and Mini Ratnas. Financial autonomy was initially awarded to nine PSUs as Navaratna status in 1997.[1] In 2010, the Government established the higher Maharatna category, which raises a company’s investment ceiling from Rs. 1,000 crore to Rs. 5,000 crore. The Maharatna firms can now decide on investment of up to 15 percent of their net worth in a project, while the Navaratna companies could invest up to Rs. 1,000 crore without explicit government approval.[2] There are two categories of Miniratnas which afford less financial autonomy.

The Board of Directors is considered as a crucial part of the corporate governance. The Board’s primary role is to monitor management on behalf of the shareholders. The primary responsibility of governing a company (whether private or Government Company) is upon its Board of Directors. The Board should function as follows –

  1. The Board should meet regularly, keep its control over the company and monitor the executive management of the company;
  2. The Board of Directors should steer discussions properly in the meetings with regard to the affairs of the company;
  3. The Board of Directors has responsibilities in the matter of employment and dismissal of the CEO;
  4. The Board of Directors should provide guidance and supervise on the selection, evaluation, etc. of the senior management of the company;
  5. The Board should monitor the performance of the company in the fulfilment of its business objectives, plans, and strategies. The Board also oversees to ascertain the proper management of the company;
  6. The Board also ensures compliance with the applicable laws, rules, and regulations, etc.

The Central Public Sector Enterprises (CPSEs) have to comply with the corporate governance rules made from time to time by the Department of Public Enterprises under the Ministry of Heavy Industries and Public Enterprises, New Delhi.

The Board of Directors of a CPSE shall have an optimum combination of Functional, Nominal, and Independent Directors.[3] The Functional Directors are full-time operational directors responsible for day to day functioning of the enterprise. [4] Each Board shall have an adequate number of Functional Directors on it. The Government Directors are appointed by the Administrative Ministries and are officers dealing with the concerned enterprise.[5] The Non-Official Directors are to be drawn from the public men, technocrats, management experts and consultants, and professional managers in industry and trade with a high degree of proven ability.[6]

 

The Board to act as per the Board Charter:

A clear definition of roles and divisions of responsibilities between the Board and the management of the CPSE is necessary to enable the Board to perform its role effectively. The Board should have a formal statement of Board Charter which clearly defines the roles and responsibilities of the Board and individual directors.[7]

 

Formulation and observance of the code of conduct:

The Board of Directors of a CPSE shall lay down a code of conduct for all board members and senior management of the Company.[8] All Board members and senior management personnel shall affirm compliance with the code on an annual basis.[9] The guidelines and policies evolved by the Central Government with respect to the structure, composition, selection appointment and service conditions of the Board of Directors and senior management personnel shall be strictly followed.[10]

The Board of Directors of the Company has to formulate the code of conduct for the Directors and Senior Management Personnel, and while doing so the code of conduct would among other things, include the following:[11]

  1. Act in the best interests of, and fulfil their fiduciary obligations to the Company;
  2. Act honestly, fairly, ethically and with integrity;
  3. Conduct themselves in a professional, courteous and respectful manner and not take improper advantage of the position of Director;
  4. Act in a socially responsible manner, within the applicable laws, rules, and regulations, customs and traditions of the countries in which the company operates;
  5. Comply with the communication and other policies of the enterprise;
  6. Act in good faith, responsibly, with due care, competence, and diligence; without allowing their independent judgment to 5,;
  7. Not to use the company’s property or position for personal gain;
  8. Not to use any information or opportunity received by them in their capacity as directors in a manner that would be detrimental to the company’s interest;
  9. Act in a manner to enhance and maintain the reputation of the enterprise;
  10. Disclose any personal interest that they may have regarding any matters that may come before the Board and abstain from discussion, voting or otherwise influencing a decision on any matter in which the concerned Director has or may have such an interest;
  11. Abstain from discussion, voting or otherwise influencing a decision on any matter in which they may have a conflict or potential conflict of interest;
  12. Respect the confidentiality of information relating to the affairs of the Company acquired in the course of their service as Directors for their personal advantage or advantage of any other entity;
  13. Not to use the confidential information obtained in the course of their service as Directors for their own benefit or advantage of any other entity;
  14. Help create and maintain a culture of high ethical standards and commitment to compliance;
  15. Keep the Board informed in an appropriate and timely manner any information in the knowledge of the member which is related to the decision-making or is otherwise critical for the Company.
  16. Treat the other members of the Board and other persons connected with the Company with respect, dignity, fairness, and courtesy.

The CPSE Board of Directors is also entrusted with some moral imperatives.[12] The Board has to ensure that the social responsibilities, needs, etc. are satisfied by the products of efforts involved in the company. It is to be ensured that safety standards prescribed for health, environmental and social security standards, human wellbeing, etc. are maintained. In this regard, the Board Members shall be alert. All Board Members are expected to act in accordance with highest standards of personal and professional integrity, honesty, and ethical conduct while conducting the business of the public enterprise. Values like equality, tolerance, respect for others, non-discrimination by race, religion, sex, caste, age, etc. to be maintained by Board Members. Further, confidentiality about the affairs of the Company should always be kept.

 

Conclusion:

By releasing guidelines on corporate governance, the Government has shown a strong inclination to improve the corporate governance standards in India. It is highly expected that a mechanism to evaluate the Board’s overall functioning should be instituted. The process shall be result oriented and not aimed at specific individuals on the Board.[13]

[1] https://en.wikipedia.org/wiki/Public_sector_undertakings_in_India

[2] https://en.wikipedia.org/wiki/Public_sector_undertakings_in_India

[3]  Clause 3.1  of Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[4] Functional Directors, ANNEX-I, Guideline on Composition of Board of Directors of CPSEs annexed to the Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[5] Government Directors, ANNEX-I, Guideline on Composition of Board of Directors of CPSEs annexed to the Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[6] Non-Official Directors, ANNEX-I, Guideline on Composition of Board of Directors of CPSEs annexed to the Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[7] Clause 3.5  of Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[8] Clause 3.4.1  of Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[9] Clause 3.4.2  of Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[10] Clause 3.4.3  of Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises.

[11] ANNEX-I, SUGGESTED LIST OF ITEMS BE INCLUDED IN THE CODE OF CONDUCT, annexed to the Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises

[12] Clause- 5 , Part-I, ANNEX-VI, MODEL CODE OF BUSINESS CONDUCT AND ETHICS FOR THE BOARD MEMBERS AND SENIOR MANAGEMENT, annexed to the Guideline on Corporate Governance for Central Public Sector Enterprises(CPSEs), 2010, Department of Public Enterprises

[13]  Page-8, The Corporate Governance in the Public Sector, The Road Ahead, June 2010, KPMG India, a Swiss entity.

 

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