Others include the rotation of a company's statutory auditors and audit partners, a fixed tenure for independent directors or the number of times he can be re-elected and lowering of the ceiling on directorship that can be held by an individual who is already serving as a whole-time board member of a company. The guidelines also focus on the need for corporations participating in development programmes to benefit communities, the support and co-operation of which are important to the survival and growth of a business undertaking.

In fact, the year 2010 may go down in the history of India's corporate reform if Parliament is able to pass the draft legislation, now before the select committee, replacing the Companies Act of 1956, within this year. One of the key attributes to the new act is the incorporation of a set of guidelines that combines the practice of good corporate governance and management transparency with social responsibility. The Companies Act, 1956, some of the provisions and practices of which are over a century old carrying many legacies of the Raj, is not in sync with the expectations and requirements of the present era of globalisation and the growing stakeholder demand for greater corporate attention to environment protection and community concerns. The best thing about the proposed companies act is that it seeks to carry a human face.

The government's intention, as described by Corporate Affairs Minister Salman Khurshid and departmental secretary Ramsebak Bandyopadhyaya, is to enact a corporate law which is not only business friendly but also tries to take care of urgent social and community concerns. Several provisions are made in the proposed new law to address these concerns while according top priority to corporate governance and transparency in the financial management of public companies. Efforts are also being made to induce more and more closely-held companies to go public for their social acceptance and business transparency. The number of joint-stock companies, the shares of which are listed and actively traded in the market, is abysmally low compared to the number of registered companies in the categories of medium or large business undertakings — both foreign and domestic — and deemed public companies. There is a case for listing of at least 1,000 more closely-held firms, feels the Ministry of Corporate Affairs.

The ministry trusts in the goodness of corporate management and, that is why, it wants to list the measures to ensure good corporate governance as guidelines to companies instead of making them mandatory under the law. However, if the companies do not live up to the expectation of the Government and the public, the latter may be forced to amend the proposed act to provide them with the necessary legal teeth. This has apparently been made quite clear by the ministry before the apex industry bodies such as the Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce and Industry (FICCI) and the Associated Chambers of Commerce (ASSOCHAM), with which the Government has closely worked to pen the proposed act.

Yet, there are several loose ends and ambiguities with regard to the fabrication of the guidelines, which need to be tightened and cleared before they become part of the final legal document. For instance, the mere separation of offices of chairman and CEO will make little sense if both hold executive positions as in the case of many large public sector corporations as well as some of the private sector companies. The chairman of SAIL is also the CEO (CMD) of the public sector steel giant, which has as many as five managing directors. In the past, SAIL also had executive vice-chairman, who had no authority over operations, marketing and finance. He was merely in charge of the technical side of the management. Coal India's case is even more peculiar. It is an umbrella company, holding together over half-a-dozen subsidiaries, all having CMD at the top. Indian Oil Corporation has a whole-time chairman (CMD) and more than one MD. Even in the private sector, there is no uniform management structure for all companies. There are companies having more than one MD and independent chairman. Also there are others which are totally board-managed, without any whole-time director. CEO is designated as President. The latter is a permanent invitee in all board meetings.

The growing trend of the flat management style in developed economies and elsewhere has done away with the position of all-powerful CEO or MD. Instead, it has multiple function heads, who operate like MDs or Presidents, somewhat on the lines of SAIL MDs. Chairman functions as CEO but, at the same time, the Boss does not singularly enjoy 'unfettered decision making powers' under the flat management system. However, In India, which has very few truly widely-held professionally managed companies, the corporate management mechanism is controlled by promoters - be they business families or the government. Independent directors are hardly independent. Most of them are hand-picked 'yes men' of the promoters. There are no special criteria set for selection of independent directors. Thus, the Government's effort to 'promote balance of power' in a business corporation by merely bifurcating the roles and responsibilities of chairman and CEO/MD is unlikely to deliver the desired goal.

Under the circumstances, the only set of new guidelines which promises to protect non-family, non-promoter shareholder interest concerns the appointment and retention of statutory auditors and audit partners. The proposed three-year term for an audit partner and five-year term for audit firm are most certainly expected to break the unholy management-auditor nexus, which exists in a large number of companies, especially in the private sector. The proposed rotational system for the appointment of auditors and audit partners and the compulsory 'cooling-off' period before their reappointment are a bold step towards ensuring financial management transparency and good corporate governance. The rotational auditor appointment system exists in the public sector. In all fairness to the Government, the proposed guidelines, if adhered to by the corporate sector in letter and spirit, will certainly go a long way to establish good governance and better management-stakeholder relations in the long run. It is a good beginning. And now, the corporate sector has to play the ball. (IPA Service)