Competition and Corporate Governance Competitive business environment and appropriate good corporate governance have a nexus, the

former fuelling, influencing and impacting the latter and the latte r seeking to meet the challenge of the former. For corporate governance, inherin g competition principles in policy making would appear sine qua non. Competition has a strong correlation with economic development. Corporate governance (desig ned to home in corporate performance leading to economic development), consequen tly needs to fashion itself to meet competition and to steer clear of indulging in (inadvertently or otherwise) anti-competitive practices. Corporate governance needs to inhere the interests of consumers and economic development Competition is a dynamic concept with no unique definition, except what is unde rstood in common parlance in the context of Market and Trade. In a manner of spe aking, competition can be likened to what is anti-thetical to monopoly. While mo nopoly is pernicious to consumer interest and free and fair trade, competition a ffords wide ranging benefits to consumers. Adam Smith (1776) captured this altru ism in his famous book "Wealth of Nations", when he observed: By a perpetual monopoly, all the other subjects of the State are taxed very abs urdly in two different ways, first by the high price of goods, which, in the cas e of a free trade, could be bought at much cheaper rates and secondly, by their total exclusion from a branch of business, which it might be both convenient and profitable for many of them to carry on. There is and can be no perfect competition in the real world. What one notices in the market is a set of imperfectly competitive markets, where firms engage in strategic behavior to maximize their profits and to restrict the opportunities available to their competitors. This kind of behavior results in distortion of c ompetition, exploitation of consumers and imposition of various economic and soc ial costs on society, adversely affecting its welfare in general. What is needed is appropriate behavior on the part of manufacturers/suppliers a nd service renderers, a significant proportion of whom constitute corporate enti ties not only in terms of complying with the applicable laws and regulations and , in particular, complying with Corporate Laws and Competition Law but also in t erms of sub-serving the large societal interest, namely, public and consumer int erest. This article addresses the relevance of competition to corporate governance, wh ich, in turn, impacts economic and social development of the countries where the corporates are situated. Competition policy or competition regime seeks to maintain and encourage the co mpetitive process with a view to promoting economic efficiency and consumer welf are. Its objective is to spur firms and individual players in the market to comp ete with each other to secure the patronage of customers in terms of, inter alia , competitive prices, good quality and greater choice for them. The contours of competition regime vary significantly from country to country. The differences are, by and large, reflected in the stated objectives of competi tion legislation across the countries. The most common objectives, applied with varying emphasis in different countries are economic efficiency, consumer welfar e and public interest. In his analysis of new concepts for competition policy an d economic development, Singh (2002) has suggested that standard objectives of c ompetition regime should be reconsidered to bring in notions, such as, inter ali a, an optimal degree of competition as opposed to maximum competition, an optima l combination of competition and cooperation between firms, dynamic rather than static efficiency and consistency between competition and industrial policies. F or corporate governance, therefore, inhering competition principles in policy ma

king would appear sine qua non. Competition-A Dynamic Concept Professor J.M. Clark in his paper on "Workable Competition" conceived competiti on as an amalgam of factors that stimulate economic rivalry. He referred to comp etition as a dynamic concept, as it attempts to judge forms of industrial organi zation and the policies of firms by reference to the extent to which they promot e or hamper this rivalry. Competition according to him, describes the kind of ma rket pressure, which must be exerted to penalize laggards and to reward the ente rprising, and in this way to promote economic progress (Clark 1940). Prof. Schumpeter on the other hand has noted that the ordinary forms of price c ompetition favored by economists and Anti-trust Bodies can at best only protect consumers against being charged excessive prices in relation to current levels o f cost. He goes on to say that only the very large organizations which are prote cted from the full impact of competition are capable of laying their hands on re sources which permit them to bring innovations to fruition as well as to meet th e risks of introducing them. Without the high profits, which their monopoly or d ominance enables them to earn, the incentives and the means to innovate would be lacking (Schumpeter 1942). LPG Paradigm LPG in pre-reform regime would generally mean Licensing, Planning and Governmen t Control. In the post-reform regime, LPG would mean Liberalization, Privatizati on and Globalization. LPG paradigm pervades the approach of many a country now. Consequently, at the micro level, for firms to remain competitive, they are now required to adopt global strategies. As the number, size and scope of activities of multi-national companies, corporations and firms (MNCs) increases, more and more of them are forging and operating strategic alliances and their commercial practices are having an increasing international dimension than ever before. The se processes are resulting in increased cross-border trade and at times anti-com petitive practices. Such practices tend to undermine the benefits of liberalizat ion by countries. The preamble to the WTO clearly stipulates that the "relations in field of trad e and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income ...... in a manner consistent with their respective needs and concerns a t different levels of economic development." The basic tenet of the competition policies is the inherent interest and welfare of the consumers and the efficient allocation of scarce resources. Therefore, while it is necessary to ensure that Liberalization, Privatization and Globalization (LPG paradigm) lead to enhancem ent of competition, it is equally necessary to establish a mechanism that ensure s a healthy competition in a globalized economy. Corporate governance needs to in-here the interests of consumers and economic d evelopment and is thus very closely related to competition policy. Corporate Governance and Consumer Interest All corporate activities ultimately have at their consummating point, the consum er. Consumer welfare and interest aim at the charter of economic liberty designe d for preserving free and unaffected competition as the rule of corporate govern ance. The premises on which the charter rests are unrestrained interaction of co mpetitive forces, maximum material progress through rational allocation of econo mic resources, availability of goods and services of acceptable and good quality at reasonable prices and finally a just and fair deal to the consumers. Corpora te governance has to factor these, if it has to live up to its responsibilities by the country and its subjects.

At the micro level, for firms to remain competitive, they are now required to a dopt global strategies as a part of corporate governance. As the number, size an d scope of activities of multi-national companies, corporations and firms (MNCs) increase, more and more of them are forging and operating strategic alliances a nd their commercial practices are having an increasing international dimension t han ever before. These processes are resulting in increased cross-border trade a nd at times anti-competitive practices. Such practices tend to undermine the ben efits of liberalization in most countries. Corporate sector is not only made up of MNCs but also is mostly constituting of small and medium industries. Corporat e governance, therefore, would mean more of governance in the small and medium i ndustries. This does not imply that corporate governance in MNCs is not a candid ate for sub-serving competition principles. All corporates need to in-here compe tition principles in their governance, be they big, medium or small in size and operations. But one distinction is worth reckoning in the discussions in this ar ticle that MNCs by virtue of their size, clout and sweep in their activities and presence in many countries could inject anti-competitive practices into the mar ket to the detriment of consumers and the interests of the countries concerned. The thrust of this article is that corporate governance needs to be molded in su ch a way that the markets are driven by competition and that consumer interests are protected. Role of Corporate Governance Corporate governance is generally perceived to be focusing on shareholders' rig hts, conduct and output of managers and performance of directors. Most companies lay stress on encouraging investor confidence, on improving the quality of inve stment decisions, on preventing idle capacity and even preventing a build-up of excess capacity and generally on fostering their resiliency. In other words, cor porates tend to fashion their governance on one or more or all of the above obje ctives. But many corporates are prone to give inadequate attention to the enviro nment in which business is conducted. Environment includes the degree of competi tion among firms, extant level of competition in the market, entry and exit rule s and the openness of the economy. With competition regime being ushered in or s trengthened in many countries, there is an increasing appreciation of the need t o factor in the competition principles in corporate governance. Business environ ment in its broadest sense has a significant impact on the corporates' incentive s to seek out and implement competitive practices and strategies. Competitive business environment and appropriate good corporate governance have a nexus, the former fuelling, influencing and impacting the latter and the latt er seeking to meet the challenge of the former. Challenges of Business Environment Business or market environment is often vitiated by the conduct and behavior of a few incumbent firms, which usually account for a very large share of the mark et for goods and services. Consolidation and worse, concentration, leads to mono poly or oligopoly or dominance. These few incumbent firms are able to act indepe ndent of the competitors in the market, particularly in fixing prices, in limiti ng production and in cartelizing. Such action is detrimental to consumers and th e countries, where they operate. Ownership of such corporates is in the hands of a small group of large shareholders, thus affording them effective control of t heir affairs. Effective control of the affairs of the corporates and ownership c oncentration result in rents accruing to the set of large shareholders and their nominees in Management. They sometimes siphon off the revenues and assets of th e corporate bodies. Despite standards prevalent in accounting and auditing areas , monitoring the performance of corporates leaves very much to be desired becaus e of inadequate or lack of disclosure of vital information on the part of the co rporates. The case of Enron and more recently of Satyam illustrate this phenomen on. One needs to pierce the veil of the corporates to reach the reality. Many de veloping countries and even developed countries suffer from pervasive corruption

and unpredictable judiciary. In such a milieu of business environment, there is a big need for good corporate governance. Many corporates miss out on appreciat ing the deleterious consequences of the constellation of business factors consti tuting the environment and on the imperatives of good corporate governance. Competition Correlates with Economic Development There is empirical evidence of the benefits of competition regime vis--vis econom ic development, greater efficiency in international trade and consumer welfare l isted in a report (UNCTAD1997). The evidence, albeit referring to experiences of developed countries, indicates substantial benefits from the strengthening of t he application of competition policy principles in terms of "greater production, locative and dynamic efficiency, welfare and growth." It further concludes that the consumer and producer welfare and economic growth and competitiveness in in ternational trade have all flowed out of competition policies, deregulation and surveillance over Restrictive Business and Trade Practices. Noting that competit ion rewards good performance, encourages entrepreneurial activity, catalyses ent ry of new firms, promotes greater efficiency on the part of enterprises, reduces cost of production, improves competitiveness of enterprises and sanctions poor performance by producers, the empirical evidence in the report suggests that com petition ensures product quality, cheaper prices and passing on of cost savings to consumers. The report also observes that competition promotes two types of ef ficiencies, namely, static efficiency (optimum utilization of existing resources at least cost) and dynamic efficiency (optimal introduction of new products, mo re efficient production processes and superior organizational structures over ti me) (UNCTAD, 1997). Analyzing the empirical evidence, the UNCTAD report has the following to say : In the Netherlands, it has been calculated that the average annual consumer los s arising from collusive practices or restrictive regulations in several service sectors amounts to 4,330-5,430 million guilders (around $2.1-2.7 billion) (Hend rik P. van Dalen 1995). Data relating to the United States show that a bid riggi ng conspiracy for the sale of frozen seafood which was eventually prosecuted had an average mark-up over the competitive price over a one year period of 23 per cent (LukeM.Froeb et al. 1993) and the break down of price-fixing conspiracies i n some industries has led to steep declines in manufacturing costs (Scherer and David Ross 1990). It is true that cartels may sometimes facilitate adjustment, b ut vigorous competition may sometime be as or more effective in forcing rational ization of industries, particularly in larger markets (Scherer and David Ross 19 90). An examination of some exempted rationalization cartels in Germany (several different types of cartels are allowed under the German competition law, subjec t to certain conditions) found that they had promoted the viability of the produ cers in the industries concerned, but there was little evidence that they had co ntributed to productivity and efficiency improvements, while they had resulted i n higher prices and less output (David B. Audretsch 1989). There is enough testimony to underscore the benefits that flow from redesigned Government policies in favor of competition. For instance, in the European Union , the implementation of the policy of removal of barriers to trade is estimated to have increased income by 1.1-1.5 per cent over the period 1987-93 and to have created 30,000-90,000 jobs and to have decreased inflation by 1.0-1.5 per cent. Around half of this is attributed to increases in competition and efficiency im provements (Commission of the European Communities 1996). Competition therefore has a strong correlation with economic development. Corpo rate governance (designed to home in corporate performance leading to economic d evelopment), consequently needs to fashion itself to meet competition and to ste er clear of indulging in (inadvertently or otherwise) anti-competitive practices . Restricted Competition Impedes Good Corporate Governance

As noted earlier, competition influences and impacts corporate governance. The LPG paradigm drives markets for goods and services to be competition driven. But dominance, oligopoly and monopoly prejudice competition. Ownership concentratio n, market concentration and consolidation add to the prejudice. Compounding thes e are regulatory barriers (brought about by the State) and firm-level practices limiting competition in takeovers, divestiture and privatization. The above said prejudice occurs in both developing and developed countries. In this scenario, corporate governance is the causality because of the fact that the corporates do minating the market are getting their rents and excessive profits in the sub-opt imal competitive environment. If the business environment is reasonably competit ive, corporate governance cannot afford to be slack or to be unmindful of compet itors and potential competition. Corporate governance manifests itself in terms of supervision and timely decision-making by the Board of Directors or the Manag ement. Where competition is inadequate or sub-optimal, corporate governance tend s to become loose and slack, with decision-making in business matters by corpora tes delayed or postponed. Jensen (1993) has noted that slack governance by a corporate, even if dominant, results in decline in corporate performance impacting consumers and shareholder s adversely. This was based on an analysis of the corporates in the US during th e late 1980's, when stringent anti-takeover regulations impeded control transact ions resulting in a large number of dominant and market leading corporates faili ng to add economic value for their capital and R&D expenditure. The business env ironment suffered from sub-optimal competition and consequently, the return on c apital was unsatisfactory. Restricted competition in the market for goods and services in developing count ries can injure the interests of consumers and retard economic development. Stat e sponsored policies may place restrictions on ownership and entry. Restrictions of this kind are driven by politics or pressure groups or vested interests. The y are generally justified in the name of "public interest". Incumbent firms coul d enlarge their presence and interests taking advantage of the protectionist pol icies of the State. In the process, such firms could well become monopolistic or dominant. They may be enabled in this environment to make usurious profits in e xcess of competitive returns. In the competition-lacking market environment, pri ces are likely to get distorted and while incumbent dominant corporates take adv antage of their market power and reap profits, it is the consumer whose interest is prejudiced by way of higher prices etc. State sponsored policies, particularly those which create entry barriers and wh ich are protectionist in nature afford easy profits for incumbent firms, who the refore have little or no incentive to utilize their resources efficiently. Being insulated from competition, their production costs are likely to be higher than if they had not been. Where competition is present in ample measure, the firms, even if dominant, would be forced to cut costs, innovate and improve quality of their goods and services by adopting the best technical and managerial practice s. Sans competition, the incumbent firms may make poor investment decisions or d elay addressing business problems. Distorted prices, misallocation of resources and poor or delayed decisions may all lead to consumer interest prejudice and to a resulting burden on the society. Ownership concentration and consolidation get aggravated, if there is no compet ition or there is sub-optimal competition in the market. The predilection of inc umbent firms to be major market players and preferably to be dominant cannot be gain-said. If they are private firms, they would like to continue to be so. Even if they would like to go public, they would not like to give up control by reta ining a controlling stake. A study by the World Bank (1999) shows that in less c ompetitive markets, a higher share of the leading firms remain private and that a higher proportion of closely held firms are observed among publicly traded com panies. In closely held corporates and ownership concentration, there is always

the possibility of corporate insiders committing abuses using confidential infor mation privy to the corporate. Such a possibility may shy away minority sharehol ders and lead to the undermining of the development of securities and capital ma rkets. LPG, Competition and Politics Large and dominant firms, though few in number, have a significant influence in shaping the legislative and regulatory agenda of the Government. This is so in both the developed and the developing countries. In the developed countries, one would normally countenance powerful press, informed opinions and independent me dia. These in combination are likely to dement the influence over the Government of the powerful corporate entities, who dominate the market. In the developing countries, however, informed opinions may be less prevalent, the media may be le ss and not totally independent but under some control of Government and the pres s less powerful than in the developed countries. Ergo, the influence of the domi nant corporate entities in developing countries may be able to shape the legisla tive and regulatory agenda of the Government. Illustratively, the privatization policies under the LPG paradigm are generally opposed by not only the political parties left of centre but also by public ent erprises driven by a sense of survival. The pressure applied by public enterpris es on the Government on its policies of privatization is however, usually counte red by a strong pressure in support of such policies from the private corporate sector, particularly from monopolistic or dominant firms. Government tends to he ed and give in to the pressure of the private corporate sector, which more often than not finances the political parties constituting the Government. Incumbent domestic banks attempt to entrench their position in the country by opposing pol icies that would permit foreign banks to compete with them. Likewise, opening ce rtain sectors to foreign competition is met with opposition from domestic player s, particularly the dominant ones in the sectors. One could generalize and say t hat there is a strong nexus between market power and its political influence on Government decision-making. Yet another phenomenon that one comes across frequently is the predilection of incumbent firms for entrenching their position and power in the market. Major sh areholders in a company eliminate the small and minority shareholders by buying them out and reducing the latter's voting power. This is also achieved by issuin g new shares in private placements. Firms which succeed in entrenching their pos ition and power apply pressure on the Government, before crucial decisions are t aken which impact them. The pressure is riveted to sub-serve their own interest and to dilute or prevent competition in the market against them. They seek to re sist policies that would adversely affect their interests. Having said this, it is a matter of concern that by limiting competition, small and new businesses are made to face entry barriers like access to capital. Lend ers, investors and even banks are prone to support loan and equity demands from large, dominant and entrenched firms rather than from small and new firms. This further entrenches incumbent firms and leaves the weak and small ones from acces sing capital for survival and growth. Entrenchment of monopoly and dominant firm s has another deleterious effect. Prices are fixed at higher than competitive le vels with profits and rents enriching incumbent firms. Besides being prejudicial to consumers, high prices are detrimental to social welfare. Pressure groups can seriously undermine reforms constituting the LPG paradigm. For LPG paradigm to succeed there is a strong necessary condition that effective competition should drive the market. Politics and pressure groups are likely to result in stifling competition, thereby stifling the LPG reform process and con sequently impeding economic development of the country. Good corporate governance essentially involves eschewing entrenchment, pressure

groups and undermining of the reform process. The last mentioned dimension-the reform process-includes fostering of competition in the market. Corporate Governance and Competition It has been noted earlier that large and dominant firms seek to entrench themse lves and further their interests. Because of their size, dominance and financial clout, they are in a position to call the shots regarding prices, quality and o utput. By forming cartels, they could limit the output, create scarcity of goods and services in the market and increase the prices beyond competitive levels. E xcessive profits and rents are earned by dominant and monopolistic firms leaving the consumers poorer and at their mercy. In a competitive environment, incumben t firms may not be cornering excessive profits and usurious rents. While profit making is justified and should be allowed, profiteering should be prevented. Rea sonable profit making will allow new parties into the market resulting in more s upplies (perhaps, better supplies in terms of quality) and lower prices driving down profitability. In a market driven by competition, there is always an incent ive to bring about technological advances and innovations thereby providing the consumers with better quality products and new products. The arguments above bring into focus the need for good corporate governance. Go od corporate governance does not lie in eliminating competition by seeking Gover nment intervention and policies of protectionist nature but lies in meeting comp etition headlong. Meeting competition means enhanced operational efficiency, cut ting costs, keeping down administrative expenses and affording quality products at reasonable prices to the consumers etc. Market power should be used construct ively to sub-serve consumer interest and the national interest. It should not be misused to merely entrench oneself in the market and to make unreasonable profi ts. It is the responsibility of corporate governance to ensure the constructive use of market power. Corporate governance should ensure that the corporates do not indulge in anti-c ompetitive practices. Despite the temptation to cartelize and fix prices, a corp orate entity or firm should not lend itself to join other firms in the same line of production or service with the object of colluding with them and drive the m arket with higher prices and lower output. In particular, corporates should avoi d colluding with competitors to the detriment of consumers. Collusive practices include cartelization, price fixing, limiting outputs, bid-rigging, market alloc ation by territories or customers, limiting technical development etc. Enlighten ed corporate management will steer clear of such collusive practices and will co ndemn them by bringing action against colluding offenders responsible for advers ely affecting competition in the market. The objective of competition is a free and fair market. It will lead to enhance ment of economic freedom and lower barriers to entry for new firms and competito rs. In the long run, firms which believe in good corporate governance are likely to succeed in the market and also to foster a healthy competition in the market . Good corporate governance in a competitive milieu is likely to serve the intere sts of consumers and the society. LPG paradigm, if effectively implemented will have to focus on competition principles, which should inform legislative and exe cutive policies. While LPG can stand on its own, it will stand better, if buttre ssed with effective domestic competition. For buttressing domestic competition, every country needs to have a sound competition policy and an appropriate compet ition law to enforce the policy. The competition policy to be posited by the Gov ernment has therefore an important responsibility to ensure that the corporate s ector plays a just and equitable role through good governance. Governmental poli cies should allow free play to market forces and promote a competition driven ma rket. At the same time, no corporate body should be allowed to abuse its positio n in the market, particularly, its size, dominance and financial clout. Carteliz

ation and abuse of dominance need to be frowned upon by the Competition Tribunal or Agency. Offenders should be brought to book with deterrent punishments. Havi ng said this, it is incumbent on the corporates not only to follow the rule book on competition but meet competition by way of being competitive and not by way of seeking rent and protectionist policies. Competition Tribunals should be inde pendent, transparent, accountable and free of political influences. They should play the role of competition advocate and inculcate competition culture in the m arket. Competition, Development and Corporate Governance are inter-linked and any brea k of the link is only at the peril of the society.