ABSTRACT

Public entities Corporate Governance is a concept that is gaining more and more field both in
specialized literature and in practice. The public bodies Corporate Governance as leadership and
control method involves a set of clear rules and principles (integrity, honesty / sincerity,
transparency and responsibility), clear risk management and control mechanisms, elements
needed to achieve the purpose of public entities, which is satisfying public needs. The purpose of
the paper is to analysis of the development process of the Corporate Governance concept in
public entities and of how it is an efficient governance form. The paper makes an attempt to
understand the reasons behind the failure to uphold proper governance of the PSUs in India. Few
structural problems which hinder the proper functioning of corporate governance in public sector
units of India are their conflicting objectives, excessive government interference, lack of
managerial and commercial autonomy and lack of truly independent directors. Although Indian
public sector units have certain unique characteristics, but it should work on the impediments of
corporate governance so that it could be removed and an accountable and transparent corporate
governance structure can prevail.
I. INTRODUCTION

Public Sector Undertakings (PSUs) contribute significantly to the economic development of any
country as their services are aimed at overall welfare, and also because they support other
institutions and businesses. They function quite differently from private sector organizations.
Private firms are owned by entrepreneurs or shareholders, while public agencies are owned by
communities.1 Private and public organizations also differ in their sources of funding, and public
organizations end up being controlled by political forces rather than market forces. The short and
uncertain tenures of politicians make it difficult to bring about gradual changes in a public
enterprise.2 Public organizations experience more turbulence, interruptions, and conflicts in their
decision-making than private organizations.3 Formal rules, multi-layered hierarchies,
organizational silos, lack of economic incentives, and divided political leadership at the top of
public bureaucracies tend to stifle innovation in PSUs.4

LEADERSHIP MANAGEMENT AND PUBLIC SECTOR UNDERTAKING

As market forces increasingly replace government controls, corporate governance is fast gaining
prominence in business circles. Corporate governance is concerned with the way in which
corporate entities are governed, as distinct from the way in which businesses within those
companies are managed. The public sector units with important social responsibilities to fulfill
other than make profits also come under the scanner because ultimately they use the taxpayers’
money for their operations.

Former World Bank President James Wolfensohn has equated the "importance of the governance
of corporations to that of the governance of countries."5 According to the Organization for
Economic Co-operation and Development (OECD),6 "Corporate governance deals with the rights
and responsibilities of a company's management, its board, shareholders and various

1
(Boyne, 2002).
2
(Fernandez & Rainey, 2006).
3
(Nutt, 2006; Geetha-Taylor & Morse, 2013).
4
(Gupta, Chopra, & Kakani, 2018).
5
Low Chee Keong, The Corporate Governance Debate, in CORPORATE GOVERNANCE: AN ASIA-PACIFIC
CRITIQUE 1, 22 (Low Chee Keong ed., 2002).
6
OECD is "an international organization of member countries that conducts research on sustainable development
and other important policy issues." NancyJ. King & Brian J. King, Creating Incentives for Sustainable Buildings: A
Comparative Law Approach Featuring the United States and the European Union, 23 VA.EN'vTL. L.J. 397, 437
n.239 (2005).
stakeholders."7 The spectacular collapses of Enron8 and WorldCom9 in the United States, where
shareholders lost a combined $245 billion, and the collapse of Italian dairy giant Parmalat 10 in
Europe, have transformed corporate governance from an afterthought to the cornerstone of any
firm's or country's long-term success.

Good corporate governance is vital because of its role in attracting foreign investment. Also,
sound corporate-governance practices enable management to allocate resources more efficiently,
which increases the likelihood that investors will obtain a higher rate of return on their
investment.11 As institutional investments from financial institutions such as lending institutions,
insurance companies and pension funds are growing; investors have been increasingly
demanding transparency in company accounts, fair treatments and periodic updates about the
company’s performance. Corporate governance seeks to build confidence and trust of the
stakeholders by observing fairness and transparency in all company affairs. Therefore, corporate
governance regulations in India promote the rights of shareholders; while at the same time ensure
the interests of other stakeholders are also simultaneously protected.

However, Public Sector Undertakings (PSU's), typically has shown an "absolute disregard" for
corporate governance and the rights of minority shareholders.12 SEBI rarely has initiated any
legal action against non-compliant PSUs, likely due to the PSUs' ties with the Indian
Government. SEBI has promised strict enforcement of the new laws, however, and has
threatened severe punitive action. Punishment may include imprisonment for a maximum of ten
years or a fine of up to 250 million rupees (approximately 5.68 million U.S. dollars) against all

7
OECD: Organisation for Economic Co-operation and Development, Corporate Governance: Frequently Asked
Questions About the OECD Principles of Corporate Governance, http://www.oecd.org/faq/0,2583,en-2649-
37439_3171741311-1-37439,00.html
8
In 2000, before filing for bankruptcy protection, Enron was among the largest corporations in the world with
annual revenue of approximately one-hundred billion dollars. Faith Stevelman Kahn, Bombing Markets, Subverting
the Rule of Law: Enron, Financial Fraud, and September 11, 2001, 76 TUL. L. REV. 1579, 1584 (2002).
9
Robert Frank et al., Executives on Trial: Scandal Scorecard, WALL ST. J., Oct. 3, 2003, at BI.
10
While the demise of Enron and WorldCom can be attributed to "managers seeking to inflate earnings and
maximize the stock price," Parmalat's demise was caused by an attempt to "hide the diversion of assets to controlling
shareholders." John C. Coffee, Jr., Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms,
84 B.U. L. REV. 301, 333 (2004).
11
Rajesh Chakrabarti, Corporate Governance in India-Evolution and Challenges 3,(Jan. 17, 2005), available at
http://ssrn.com/abstract=649857.
12
Arun Jethmalani, The Socialist Time Wrap, ECON. TIMES (Bombay, India), Oct. 9, 2005,available at 2005
WArLNR 16345413.
firms that fail to meet the criteria set forth by Clause 49.13 SEBI also has threatened to de-list
recalcitrant firms.14 With respect to corporate governance, public entities should be held to the
same standard as private firms and must not be given any preferential treatment. It can be argued
that the Indian Government should adopt corporate-governance best practices in its public
entities as a model for the private sector to follow. However, given SEBI's unpromising track
record,15 the question remains to be seen whether it will follow through with its proclamations.

2. MAJOR CHALLENGES IN THE GOVERNANCE OF PUBLIC SECTOR COMPANIES

2.1- PSU'S REMAIN A LAGGARDS IN CORPORATE GOVERNANCE - SES REPORT

Resenting the Budget for 2016-17, then finance minister Arun Jaitley had said “public
shareholding in government-owned companies is a means of ensuring higher levels of
transparency and accountability.” While listing central public sector enterprises (CPSEs) was
seen as one way to improve performance and competitiveness, allowing them easier access to the
capital markets and making them more transparent and accountable, CPSEs have largely failed to
stand up to scrutiny on corporate governance.

According to a report by proxy, advisory firm Stakeholders Empowerment Services (SES)16,

only 14 out of 48 PSUs surveyed were found to be fully complaint as on September 2018. While
22 PSUs were non-compliant with laws relating to the composition of their Board of Directors,
17 failed to spend the required amount on CSR activities17. Others were non-compliant with
rules regarding the composition of audit committees, nomination and remuneration committees
and having an adequate number of independent directors. In fact, although the requirement of
having at least one woman independent director on the boards of the top 500 listed companies

13
To Comply with Clause 49 of Listing Agreement-'ONGC Board May Have Fewer Govt. Directors', HINDU BUS.
LINE (India), May 24, 2005, available at 2005 WArLNR 8165396.
14
Id. The reach of the new laws extend to PSUs as well. SEBI recently informed PSUs that they cannot have more
than two "government directors" on their boards. Laxmi Devi, How Can Clause 49 Affect India, lnc?, ECON.
TIMES (Bombay, India), June 10, 2005, available at 2005 WLNR 9158955.
15
SEBI has a history of "losing high-profile cases." Call for Action, FIN. EXPRESS (Mumbai, India), Sept. 14,
2005, available at 2005 WALNR 14503554. Further, SEBI often has been overly accommodative of PSUs.
16
cite report
17
id.
kicked in from April 1, 2019, 27 per cent of the NSE top 500 companies, as on March 2019,
failed to comply with this requirement.18

The report highlights that a complex ownership framework combines the conflicting roles of
policy-making and ownership in some ministries, allowing political interference in board
appointments and commercial decision-making to continue, and weakens board powers. CPSE
boards continue to be oriented to the public sector and are rarely, if ever, evaluated on their
performance the report added. Implementing disclosure requirements, however, is a challenge in
light of relatively weak internal audits and control functions, lack of guidance on disclosure for
non-listed firms, and potential duplication and delays in the various CPSE audits. Experts say the
government should fix these issues since shareholders are willing to pay a premium for
companies rated high on corporate governance.

2.2- PSU BOARD STRUCTURES AND INDEPENDENT DIRECTORS

2.1.1- Chairman–CEO Duality

Chairman–CEO duality occurs when a single individual serves as the CEO as well as the chair of
the board. It is one of the most widely discussed corporate governance phenomena(Dalton, Hitt,
Certo, & Dalton, 2007). Theoretical and empirical works that discuss the effect of Chairman–
CEO duality on corporate governance issues of firms provide two divergent views (Krause,
Semadeni, & Cannella, 2014). On the one hand, scholars supporting the organization theory
based paradigms, such as stewardship theory (Donaldson & Davis, 1991) and resource
dependence theory (Boyd, 1995), argue that Chairman–CEO duality promotes unity of
leadership and, thus, facilitates organizational effectiveness. On the other hand, the agency
theory suggests that boards should be independent from management to prevent managerial
entrenchment (Eisenhardt, 1989; Fama & Jensen, 1983). Based on the views of agency theorists,
some countries like the United Kingdom have made it mandatory for firms to separate the role of
chairman and CEO. In India, it is not a mandatory requirement.

However, the UDAY KOTAK Committee has recommended on the separation of the Roles of
chairman and managing director. as per the recommendations, chairmanship should be limited to
only non-executive directors. Listed firms with more than 40% public shareholding should have
18
id.
separate roles of chairperson and MD/CEO with effect from April 1, 2020. After 2020, SEBI
may examine extending requirement to all listed entities with effect from 2022.19

2.2.2- Size of the Board

One school of thought is of the opinion that there is a positive impact of bigger boards on firm
performance, as a bigger board allows directors to specialize, which in turn leads to more
effectiveness20. Also, a bigger board allows for the inclusion of experts from diverse fields 21 who
can be entrusted with the responsibility of making better strategic decisions, thereby enhancing
the performance of the firm.22 Another school of thought suggests that there is a negative
association between the board size and firm performance.23 A bigger board encounters problems
such as lack of communication and coordination among the members of the board, 24 high agency
cost, less group cohesion,25 and high levels of conflict.26 Generally, the board size of PSU's are
bigger in comparison to private peers. For example, the board size of MTNL and SAIL ranged
from 122 to 17 whereas the board size of private peers ranged from six (Reliance Infra Ltd.) to
maximum 13(TATA Steel).27

UDAY KOTAK- Minimum board strength: It should be increased to 6 members and at least one
woman should be appointed as independent director. At least five board meeting for listed firms
should be held in year up from current practice of four meetings. Firms’ board should at least
once a year discuss succession planning and risk management.

19
cite report
20
Klein, A. (2002). Audit committee, board of directors’ characteristics, and earnings management. Journal of
Accounting and Economics, 33(3), 375–400.
21
Goodstein, J., Gautam, K., & Boekar, W. (1994). The effect of board size and diversity on strategic change.
Strategic Management Journal, 15(3), 241–250.
22
Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. (1999). Number of directors and financial
performance: A meta-analysis.Academy of Management Journal, 42(6), 674–686.
23
Kota, H. M., & Tomar, C. (2010). Corporate governance practices in Indian firms. Journal of Management and
Organization, 16(2), 266–279.
24
Jensen, M. C. (1993). The modern industrial revolution, exit and the failure of internal control systems. The
Journal of Finance, 48(3), 831–880.
25
Evans, C. R., & Dion, K. L. (1991). Group cohesion and performance: A meta-analysis. Small Group Research,
22(2), 175–186.
26
Goodstein, J., Gautam, K., & Boekar, W. (1994). The effect of board size and diversity on strategic change.
Strategic Management Journal, 15(3), 241–250.
27
A Comparison of Corporate Governance Practices in State-owned Enterprises and Their Private Sector Peers in
India S. Subramanian, Indian Institute of Management Kozhikode, IIMK Campus PO, Kunnamangalam–673570,
Kozhikode, Kerala.
2.2.3- Independent Directors

Independent directors play a vital role in ensuring corporate governance, as they are considered
to be the true monitors who can discipline the management and improve performance of the
firm.28They are financially independent of the management, and this helps them avoid potentially
conflicting situations, which in turn alleviates agency problems and curbs managerial self-
interest.29

2.3. INDEPENDENCE OF THE INDEPENDENT DIRECTORS

Clause 49 of the listing agreement defines the term ‘independent director’ as a non-executive
director of the company who:

 apart from receiving director’s remuneration, does not have any pecuniary
relationships/transactions with the firm, its promoters, senior management or its holding
company and subsidiaries/associated firms;
 is not related to promoters/management at the board level or at one level below the board
(read ‘top management’);
 has not been an executive of the firm in the last three financial years;
 is not a partner or an executive of the statutory audit firm and internal audit firm or firms
that have a material association with the entity (legal and consulting firms) for the last 3
years;
 is not a business partner of the firm, which may affect independence of judgement of the
director; and
 owns less than 2 per cent of the voting share in the firm.
All the independent directors in the PSUs and their private counterparts were independent as per
the definition of Clause 49, but fell short when the spirit of the definition was taken into account.
In practice, most of the independent directors in the PSUs are former government
executives/PSU chairmen and were nominated by the DPE. The problems associated with
independent directors in private sector companies are different from those of PSUs. Unlike the

28
Duchin, R., Matsusaka, J. G., & Ozbas, O. (2010). When are outside directors effective? Journal of Financial
Economics, 96(2), 195–214.
29
Rhoades, D. L., Rechner, P. L., & Sundaramurthy, C. (2000). Board composition and financial performance: A
metaanalysis of the influence of outside directors. Journal of Managerial Issues, 12(1), 76–91.
independent directors of PSUs, who usually have just one term (i.e., for 3 years), those in private
sector companies remain members of the board for a very long time. Besides, they can be in the
board of multiple companies of the same group, which may lead to potential conflict of interest
in related party transactions.In the PSUs, where the independent directors are from government
services, it is questionable as to what extent they would be independent of the controlling
shareholder (i.e., the government) and work towards the interests of the minority shareholders. If
independent directors are not really independent, their presence may actually not help in
enhancing the performance of the firm.30

2.4- AUDIT COMMITTEE

The audit committee of a board has the primary responsibility to oversee the firm’s financial
reporting process. It regularly meets the external and internal auditors as well as finance
managers in order to review the financial statements, audit process and internal accounting
controls.31 Clause 49 makes it mandatory for all listed companies to have an audit committee
with a minimum of three members.

As per this norm, all the members in the committee should be non-executive directors, a majority
should be independent and at least one director should have financial and accounting knowledge.
It also states that the chairman of the committee should be an independent director, responsible
for addressing shareholders’ queries at the annual general meeting. Also, the primary
responsibilities of the audit committee are to appoint/re-appoint and, if required, replace or
remove the statutory auditor. It also plays a vital role in regulating audit fees of statutory
auditors. But PSUs have not mentioned this norm while providing the terms of reference to their
audit committees. This is because, unlike private companies, the audit committees of the PSUs
have only limited control over the above responsibilities, as the actual power is vested upon the
CAG.

30
Kumar, N., & Singh, J. P. (2013). Effect of board size and promoter ownership on firm value: Some empirical
findings from India. Corporate Governance: International Journal of Business in Society, 13(1), 88–98.
31
Klein, A. (2002). Audit committee, board of directors’ characteristics, and earnings management. Journal of
Accounting and Economics, 33(3), 375–400.
2.5- POLITICAL INTERFERENCE AND LACK OF AUTONOMY

Keeping the political bosses happy and being in their good books is a challenge that public sector
leaders faces. Often, a lot of public sector organizations have politicians who are chairpersons of
the boards of governance. Such boards do not have sufficient representation of professionals.
Politicians pressure leaders to take non-profitable/non-professional decisions that undermine the
effectiveness of public sector organizations. Also, a lot of times pressure groups form inside
companies that align themselves to the ruling political parties. There is “bureaucratic style of
management where everything is decided by the CMD as per his skill set or on direction from
government”
Due to excessive political interference and rigid rules and norms established by the government,
a lot of participants reported lack of autonomy and freedom in decision-making for the top
leaders of the public sector organizations. Co-ordination with the government, delayed budget
approvals and political interference in decision-making are a significant challenge for leaders of
PSUs.

3. REGULATORY AND LEGAL FRAMEWORK ON CORPORATE GOVERNANCE

The most important obstacle to the corporate administration in India is the regular predominance
of significant stakeholders that are singular family ruled. The promoter's act as the prevailing
shareholders, the promoters' shareholding is spread over a few companions and relatives. The
promoters, as predominant shareholder can exchange of benefits between bunch companies and
convey special designations of offers to themselves. There are no powerful enactments to
manage the minority intrigue however there are arrangements in the declared Companies Act,
2013. Another critical issue in the Indian corporate is identified with the independent directors.
Independent directors are one of the imperative factors in all the corporate administration change
committees. The predominant shareholders select these and greater part of shareholders in the
biggest enterprise of India is either individual or family. They traditionally designate companions
or partners as the independent directors. However, several regulatory and legal mechanisms have
been introduced in order to curb these malpractices. Let us examine the existing framework.

1. THE COMPANIES ACT, 2013 inter alia contains provisions relating to board constitution,
board meetings, board processes, independent directors, general meetings, audit committees,
related party transactions, disclosure requirements in financial statements, etc. The new Act
contemplates:

 Every company is required to appoint 1 (one) resident director on its board.

 Nominee directors shall no longer be treated as independent directors.
 Listed companies and specified classes of public companies are required to appoint
independent directors and women directors on their boards.
 New Companies Act for the first time codifies the duties of directors.
 Listed companies and certain other public companies shall be required to appoint at least
1 (one) woman director on its board.
 New Companies Act mandates following committees to be constituted by the board for
prescribed class of companies:

o Audit committee
o Nomination and remuneration committee
o Stakeholders relationship committee
o Corporate social responsibility committee
 Section 134, which mandates to attach a report to every Financial statement by Board of
Directors containing all the details of the matter including the statement containing
director’s responsibility.
 Section 177, which requires Board of Directors of every listed company or any other
class of committee to constitute an Audit Committee. It also provide the manner to
constitute the committee.
 Section 184, which mandates the Director disclose his interest in any company or
companies, body corporate, firms, or other association of Individuals. The director is
required to disclose any such interest at the first meeting of the board and if there is any
change in the interest then the first meeting held after such change.

2. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) GUIDELINES –In order to ensure good
corporate governance SEBI came up with detailed Corporate Governance Norms.

1. As per the new rules the companies are required to get shareholders approval for RPT
(Related Party Transactions), it established whistle blower mechanism, clear mandate
 to have at least one woman director in the Board and moreover it elaborated
disclosures on pay packages.
2. Clause 35B of the Listing Agreement is being amended by the regulatory authority.
Now as per the amended clause, Listed companies are required to provide the option
of e-voting to its shareholders on all proposed or passed at general meetings. Those
who do not have access to e-voting facility, they should be provided to cast their votes
in writing on Postal Ballot. There was the need to amend the provision so that the
provisions of the listing agreement can be aligned with the provisions of Companies
Act, 2013. By doing so an additional requirement can be provided to strengthen the
Corporate Governance norms in India with respect to Listed companies.
3. Clause 49 of the Listing Agreement was also amended by SEBI in order to strengthen
the Corporate Governance framework for Listed companies in India. The revised
clause forbids the independent directors from being eligible for any kind of stock
option. Whistle blower policy is also added in the revised clause whereby the directors
and employees can report any unethical behavior, any fraud or if there is violation of
Code of Conduct of the company. By the amendment Audit Committee is also
enhanced, now it will include evaluation of risk management system and internal
financial control, will keep a check on inter-corporate loans and investments. The
amendment now requires all the companies to form a policy for the purpose of
determination of ‘material subsidiaries’ and that will be published online.
4. SEBI (Listing obligations and Disclosure Requirements), 2015- it requires all listed
entities to make disclosure and abide by the provisions of these regulations. The intent
here is to ensure that once the shares of a company is listed on a Stock Exchange they
are easily accessible to the normal public. The company secretary who will be the
‘Compliance Officer’ of the company shall ensure compliances and should also
provide the ‘Compliance certificate’ to Stock Exchanges. Listed companies shall have
a policy for ‘Preservation of Documents’ approved by Board.
5. SEBI (Prohibition of Insider Trading) Regulations,2015. Insider trading per se is not a
violation of Law but what is prohibited is trading by an insider on the basis of Non-
public information. To prevent such trading SEBI came up with this regulation. Under
this, the restriction is corporate insiders who arrive at trading decisions by using the
 price sensitive information directly or indirectly. Under this the disclosure mandated
at two different levels, one is the immediate disclosure of material facts while the
other is regarding disclosure of transactions undertaken. While the former prevents
insider trading, the latter reveals the insider trading.

3. STANDARD LISTING AGREEMENT OF STOCK EXCHANGES:

Clause 49 of the Listing Agreement can be said to be a bold initiative towards strengthening
corporate governance amongst the listed companies. This Clause intends to put a check over the
activities of companies in order to save the interest of the shareholders. Broadly, cl 49 provides
for the the composition of Board of director, the Audit committee, Disclosure requirements,
CEO/CFO Certification, and a separate section in the annual report on compliance with
Corporate Governance, quarterly compliance report to stock exchange signed by the compliance
officer or CEO, company to disclose compliance with non-mandatory requirements in annual
reports.

4. ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF

INDIA (ICAI): ICAI is an autonomous body, which issues accounting standards providing
guidelines for disclosures of financial information. Section 129 of the Companies Act, 2013
inter alia provides that the financial statements shall give a true and fair view of the state of
affairs of the company or companies, comply with the accounting standards notified under
S.13332 of the Companies Act, 2013. It is further provided that items contained in such financial
statements shall be in accordance with the accounting standards.

4. RECENT DEVELOPMENTS -

4.1- DISINVESTMENTS IN THE PUBLIC SECTOR UNITS

The Finance Minister recently in her budget33, said the government would continue with
strategic disinvestment of select central public sector enterprises. Economic potential of such

32
33
speech on July 5
entities may be better discovered in the hands of the strategic investors due to various factors,
e.g. infusion of capital, technology up-gradation and efficient management practices,”34
A good number of existing public enterprises are working inefficiently and incurring huge losses.
Disinvestment can lead to the improvement of efficiency of these enterprises. When government
divests a good part of its stake to a private enterprise or public at large, it increase accountability
of management of an enterprise which have a beneficial effect on the efficient working of the
enterprise. “The shareholders would require to be compensated and this will, in turn, compelling
the enterprise to run more efficiently and earn more profits”.

Disinvestment, especially privatisation of public sector enterprises, will ensure that the working
of these enterprises will be governed by professional managers guided by market mechanism
instead of being administered by bureaucrats.Functioning of these enterprises in the competitive
environment of free markets will lead to higher efficiency and productivity.

4.3- INDIAN CORPORATE GOVERNANCE SCORECARD

India has fallen 10 places to rank 68th on an annual global competitiveness index compiled by
the Geneva-based World Economic Forum. Announcing its latest index, the WEF said on
Wednesday India ranks high in terms of macroeconomic stability and market size, while its
financial sector is relatively deep and stable despite the high delinquency rate, which contributes
to weakening the soundness of its banking system. India is also ranked high, at 15th place, in
terms of corporate governance, and is at second place globally for shareholder governance. In
terms of the market size, India is ranked third, while it has got the same rank for renewable
energy regulation.

5. IMPACT OF POOR CORPORATE GOVERNANCE- RISING NPA AND SCAM

5.1- IMAPCT OF RISING NPA
In a series of recent cases, starting with the United Bank of India,Syndicate Bank Ltd, Dena
Bank and Oriental Bank of Commerce, the increasing level of non-performing assets (NPAs)
have brought into sharp focus the need to improve corporate governance and skill levels in

34
cite
public sector banks (PSBs). Earlier, the P.J. Nayak committee35 had given a report on the
functioning of banks’ boards, and made important recommendations.
Former Reserve Bank Deputy Governor K C Chakrabarty today said private banks have been
able to contain issues around asset quality plaguing the sector due to better corporate governance
and hard work.

Effective corporate governance is critical to the proper functioning of the banking sector and the
economy as a whole. There is no single approach to good corporate governance. The Basel
Committee’s revised principles provide a framework within which banks and supervisors should
operate to achieve robust and transparent risk management and decision-making. This aids to
promote public confidence and uphold the safety and soundness of the banking system. The
revised guidance emphasizes the critical importance of effective corporate governance for the
36
safe and sound functioning of banks. It stresses the importance of risk governance as part of a
bank’s overall corporate governance framework and promotes the value of strong boards and
board committees together with effective control functions.

Studies have shown that even though the presence of independent directors has influence on
board decision and the loans are being approved by the board members, the presence of
independent directors have no stronger impact on the credit risk or loan loss provisions of the
bank.37

Will it address the bad loans crisis and help kick-start economic growth?

The merger of banks per se will not lead to a decrease in the absolute size of bad loans in their
books. The size of bad loans in bank books can drop only if banks manage to improve the
recovery of these loans, or if these loans are written off their balance sheets. The bad loan
recovery process remains slow due to the inefficient judicial system in the country and banks
have been unwilling to aggressively write off bad loans since that would require recognising
greater losses. Mergers do not address these serious structural problems.

35
36
Effect of Corporate Governance on Loan Loss Provision in Indian Public Banks Amos Layola M, Sharon Sophia
& Anita M VIT University, Chennai, India (Received: 27/04/2016; Accepted: 14/06/2016
37
Hashagen, J., Harman, N., Conover, M., & Sharma, J. (2009). Risk management in banking: Beyond the credit
crisis. Journal of Structured Finance, 15, 92-103.
5.2- IMPACT OF POOR CORPORATE GOVERNANCE- SCAMS
Companies with poor corporate governance record in principle and management are the
vulnerable ones which are often exploited by fraudsters who siphon off public's hard earned
money. Scams such as ENRON and Satyam, shook the market and shareholders lost their
money.

The primary reason for the failure of Enron was attributed to an audit failure. The problem faced
by Enron was despite having structures and mechanisms in place for good corporate governance.
Nobody flaunted and flouted these rules and regulations! The board of directors turned a blind
eye to open violation of the code. Particularly, when it allowed the CFO to serve in special
purpose entities(SPEs). The auditors failed to prevent suspect and questionable accounting. The
auditors did not even examine the SPE transactions.

Satyam began facing problems from December the 16th, 2008. Its chairman Mr Ramalinga Raju,
in a surprise move announced a $1.6 billion bid for two Maytas companies. He wanted to deploy
the cash available for the benefit of investors. Raju’s family promoted and controlled the two
companies.

The share prices plunged 55% voicing concern towards Satyam’s poor corporate governance.
They overturned the decision in 12 hours. This resulted in the resignation of several independent
directors of the firm. Thus, this resulted in a further fall in the share prices of Satyam.

Corporate governance is critical issue faced by all companies. The above cases highlight the fact
that poor corporate governance can lead to a downfall of the largest companies. Regulatory
bodies have increased their scrutiny on the firms are under increased scrutiny by regulatory
bodies which increases the importance of good governance. Digital solutions can help firms
implement a robust governance mechanism to help significantly reduce risk of governance
failure.

RECOMMENDATIONS

World Bank recommendations

A. Impose market discipline
 Tighten budget constraints and establish market relations with state owned companies
 Advance CPSE listings on the capital markets
 Identify and finance non-commercial obligations directly from the government budget
 Make human resource policies more market-based
 Allow unviable companies to exit the market

B. Professionalise CPSE boards

 Bring in more private sector candidates as independent directors
 Separate the roles of board chairman and managing director
 Make board leadership/development programs mandatory
 Empower CPSE boards with greater decision-making authority
 Strengthen the audit committee of the board
 Introduce a professional board evaluation and remuneration process

C. Strengthen the state’s ownership role

 Consider moving to a centralized model as a medium to long-term option
 Focus the ministries role on core ownership functions and limit their day-to-day role
 Improve the Corporate Governance Guidelines to make them more effective
 Enhance transparency in the board appointment process

D. Enhance transparency and disclosure

 Mandate disclosure of non-commercial obligations and related party transactions
 Monitor and disclose compliance with disclosure requirements
 Strengthen internal controls and audit
 Make supplementary audits timely and carry out compliance audits on a selective basis