Evolution of Corp Governance
Evolution of Corp Governance
Evolution of Corp Governance
A good corporate governance has always been an issue since the companies started using stock market to meet their financing needs. The history of East India Company (EIC) suggests how the first publicly listed companys indulgence in trade and accounting malpractices led to the widespread public protests and demand for reform A unique similarity of such corruptive practices has been observed even after 400 years and repeated in modern corporates like Enron and WorldCom
Systems of Corporate Governance in India The Managing Agency System was an age-old system, which began in 1850. In the year 1956 after independence, Government of India in order to restrict the abuse of powers and ill-effect caused by the Managing Agents, adopted many corrective measures and provisions in the companies Act 1956. The importance of Managing Agency system almost diminished with the introduction of the Act of 1956
Systems of Corporate Governance in India Indian Managing Agency system emerged in and around Bombay and Ahmedabad mostly merchant families like Parsees and Gujaratis, who focused on cotton and textile industries and earned high profits through managing agency contracts. Subsequently, between 1920 and 1930 entrepreneurs like Tata ventured out into new areas and Marwari community also emerged.
Multiple Directorships Held by Leading Indian Industrialists Name No. of Companies F E Dinshaw 65 P D Thakurdas 42 P C Sethna 34 N B Saklatwala 29 F C Ebrahimbhoy 26 L Samal Das 26 H P Mody 14
Systems of Corporate Governance in India Industrial Policy Resolution, 1948 was the first major policy statement issued by Government affirming roles of both State and the Private Sector for development of the economy Industries (Development and Regulation) Act, 1951 was another significant legislations providing for the legal basis for industrial licensing scheme.
Evaluation of Managing Agency System A) Shareholder rights-Shareholder control- Maximizing shareholder value The criticism of Managing Agency system was that the Agents did not respect basic rights of shareholders. To minimize shareholder participation, the Agents established the firms, sold them to new shareholders but retained management control through various means like interlocking directorships, inter-corporate investments, stringent stipulations in managing agency contract making virtually impossible for shareholders to remove them, calling annual general meetings at very short notice and inconvenient times etc.
The Agents never bothered to maximize shareholder value and used to fix their remuneration at a very high percentage of profits of the firm and hefty perks by way of office allowances, leading to conflict of interest between managing agents and shareholders Financial irregularities in running the companies was another area of concern. The following were the general irregularities in managing agency system Improper inter-corporate transfers at the cost of shareholders Advancing companies fund elsewhere as unsecured loans Investing fund of listed companies including banks and insurance companies to acquire controlling interests in other firms with high liquid assets