A) Background:

• Governance: Governance which is derived from the word Gubernare, means to rule or steer. Though originally meant to be a normative frame-work for exercise of power and acceptance of accountability thereof in the running of kingdoms, regions and towns, over the years, it has found significant relevance in the corporate world. This is particularly so in the context of growing size of the corporates, widening base of their share-holders, their increasing linkages with the physical environment and their overall impact on the society's well-being. Governance has assumed even greater limelight with the series of corporate failings following which the markets, the investors and the society at large, have begun to lose faith in the infallibility of these large systems. Corporate governance seeks to recommend and establish, a control system and structure for the boards, by which the decision-making processes and communications are carried out with high degree of accountability to the stakeholders. In many ways the concern for governance is directly related to the changes in the nature of firms, the evolution of demarcation between ownership and control, the emergence of varied financial instruments and markets, and the complexities in the market structure. Thus, the simple construct of the firm in early part of the century has little in common with the modern corporate.
  
  

• Approaches to studying Corporate Governance:
  

  Most debates on corporate governance cover broadly the financial (the manner of auditing, relationship of auditors with the corporate, the disclosure mechanisms, etc.,) and the structural (structures of ownership and their implications on incentives/disincentives of "agents"; the aspect of single-tier or two-tier system, and the relationship between the two; the accountability of management vis-à-vis the boards; the rights of small investors; representation on the board of different stake holders; and their selection process, tenure etc.,). Several writings, at the same time, have not been able to arrive at the balance required to ensure that corporate governance per se is not mistaken with its implications on corporate results or restricted to analysis of the structures of stakeholders. While both these are important, they are mere aspects than the action of governance. Corporate governance is far more comprehensive and process driven. Hence, ethics become central to the process of governance and needs far more attention than bestowed so far. An integrated view of the structures, financial, ethical and behavioral aspects are called for.

• The Committees: Several committees have bestowed attention to this aspect in the recent years. The most famous is The Cadbury Committee Report, which looked at the financial aspects. It envisaged a code of best practice, institution of audit committees, time frame for directors service, reporting standards etc., This was followed by a few others eventually culminating in a comprehensive set of recommendations aimed at publicly listed private companies. This report does not cover the public enterprises or unlisted companies. In India, the CII came out with a similar report last year addressing similar issues of financial nature. In India the Scope has pioneered probably the first ever report on Corporate Governance with respect to public sector undertakings. This report carried out by Yaga Consulting addresses the peculiarities of governance in public enterprises and includes recommendations on non-financial process issues as well. The approach adopted by committees such as the Cadbury Committee have been critisised for being merely "good house-keeping approach" and as Rupert Morris Questions in Management Today is not "more than a PR gesture"
• Governance And Performance: It has been commented by many and rightly so ( including Michael Porter ) that good governance does not necessarily mean good corporate performance. Further, though rarely debated, good controls, structures and systems by themselves do not guarantee society's well-being either. The financial, legal and structural aspects of corporate governance only give the same amount of comfort as that of audited reports and managerial pronouncements which assure all that the company is a going concern, even as it is under the brink of bankruptcy or criminal prosecution (Barings, Robert Maxwells group, Orange county, ITC, Indian Bank give some evidence to this) The cutting edge for ensuring good governance is an enabling value-frame and sensitivity to ethics. While good structures and systems are necessary control mechanisms to assure the stakeholders that all is well, it is not a sufficient condition. The sufficiency dimension develops when ethical processes are integrated with the system.

B) THE TWO PROMINENT MODELS OF CORPORATE GVOERNANCE:

• Literature has identified two major approaches to corporate governance which are distinct from each other in structural as well as behavioral aspects. These are the Anglo-Saxon or British-American Model and the German/Japan models. Outside these models we now see the C.I.S and East European transitional economies grappling with the trauma of corporatising the hitherto "State" and "marketising" the planned economy for whom corporate governance issues are predominantly structural than processual at this stage. Also, the P.S.U's in general have emerged as a distinct set in the context of P.E reforms, which include changes in the structure of ownership, corporate objectives and accountability criteria and the role of non-executive directors.

I THE BRITISH/AMERICAN MODEL-FEATURES AND DYNAMICS:

• Single-Tier Board: Typically, the British-American model rests on a single-tier board. The CEO and functional heads may or may not necessarily be members of the board full-time and formally. There are occasions where the functional heads are invited to the board meetings while the board itself comprises mostly of part-time directors representing the promoters, institutions, banks and a few professional directors from the legal, consultancy, government sectors (again nominees of the promoters). Management is primarily vested with the top-team and the chief executive often exuding great confidence and picturising full control (the Economist caricatures the style as of John Wayne, the movie celebrity). The institutional investors appear to take a fairly passive role under good conditions but seem to build both formal as well as informal pressure on managements to report good performance and ensure that the stock prices are moving or maintained well. The under performing companies are particular victims of the board tyranny and are active clients for take-over and amalgamation bids. In this process pressures from the take over artist who might bid in the case of under performing companies are very high on the existing management team which seems to contrive several ways of warding these threats. (Termed poison pills).
• Index Driven Interest: The British-American model has a large base of shareholders with the institutional investors normally accounting for a minority share holding. It is also possible that the velocity of change within the shareholders, particularly in the American situation, is probably higher than that of the German or Japanese systems. It is reported that several of the institutional investors are not specifically interested in the long-term sustenance of the corporation per-se but the contribution of the concerned stock to the overall portfolio and its indexation. Several of these investors in the U.S.A pursue an index strategy by which they remain committed to the companies, which make up the index. Consequently, their concern with the short-term signals, which impinges on the stock prices, is far higher than other issues. It is for this reason that the shake-up in IBM, General motors, US steel, Good-year etc., are reportedly at the behest of the institutional investors.
• Share-holders vs Stake-holders Interests: In U.S.A, the small investors and pension fund have started taking active interest in corporate governance bringing even further pressures on managements while the latter wail as to why they cannot be left alone to "get on with the job", as the Economist points out. The activism of the index driven large investors and the small investor/pension fund types (CalPers, for instance) seem to make some board meetings no longer a social event of the classy but a high tension Plebian contest. The activists often raise unabashed questions on the salary packages of the bosses, the interest of the directors in other activities of the company, the issues of risk exposures due to product liabilities, connections with political parties, window dressing by auditor's etc. Despite this there is greater pressure among Boards as well as managements to make decisions, which place a premium on the shareholders interest more than the other stakeholders such as the employees, customers and the community. Consequently, the might of the financial markets, the dominance of the portfolio conscious institutional investor in the board and the top management responses to these, appear to be the primary set of corporate governance.
• Contestability: The process of questioning the under performing managements is termed as "contestability" and is the economists' version of confronting the top management with an alternative, even if the alternative is not necessarily an apparent one. Some believe that reformers must seek to maximize contestability for improving corporate governance. However, the downside to this is that the top managements may pursue actions, which in their opinion may be a good hedge against contestability, and this aspect is yet to be reckoned. Also, the board may use contestability for all wrong reasons trading the long-term with the short-term.
• Is Contestability Good Governance?: The serious flaw in this western argument is the assumption of rational behavior of the markets for determining the prices, the cost of counter-strategies/`poison pills' that the managements induce, the temporal dimensions in the strategies of the parties concerned and as time would tell, the number of such cycles that a corporate has to go through. In due course, there could be several game-theoretical conditions with a variety of secular as well as reflexive strategies from the investors, management and the possible bidders. Ironically, the stakeholders such as employees, suppliers, the local community and to some extent, the consumers, may not have the same set of alternatives for movement as the investor institutions and owners may have. If boards are particularly driven by the short-term financial performance and forecasts, and decisions on portfolio changes or management changes are axiomatically connected, there would be a short-shrift of corporate governance. It is in this light that the outlook of large investors in Britain and America is to treat a company as property and as one writer commented, in these countries companies can be traded as "pieces of aluminum scarp", disregarding feelings of other stake-holders, particularly the employees.

II THE GERMAN APPROACH AND COMPARISONS:

• The Two-Tier Approach: An alternative to the single-tier British/American models has been the two-tier model adopted in countries such as, Germany and Switzerland . Other countries such as Hungary, Poland and the Ukraine also seem to be following this. The structure comprises of a supervisory board made up of non-executive members appointed by the owner and a management board which is made up of managers. The German model has an additional feature of a strong institutional mechanism for employees' participation in the supervisory board and their active role in strategic decisions. This probably induces greater weightage to the employee constituency. Similarly, in Japan, though boards are not structured the same way, corporates are seen as communities and are firmly linked with the stakeholders, particularly the employees. This discernible long-term orientation in these countries have a bearing on the pattern of investment, employee policies, responses to opportunities for M & A etc., of the boards.
• Short-coming: The two-tier model has been criticized by British/American protagonists, as being fraught with tension between the boards placing the owners/managers in a position to arbitrate. On the other-hand, it is often pointed out that the tension between managements and active boards in the other model can be equally conflict- ridden as evident in several cases where the boards have flushed out chief executives, curbed executive compensations, forced better disclosure to share holders and stopped resource commitment with doubtful returns.
• The other criticism of the two-tier system is whether it is slow and time consuming in governance. However, the counter is that one would rather be as slow as "Siemens, BMW or the Daimler Benz" than as speedy as "Kodak, IBM or Robert Maxwell's group".
  

III RELATING TO INDIA:

• The Indian situation is obviously close to the British. The single-tier board system of the British/ American model has the acknowledged features of simplicity, fairly short-term orientation, relatively dispersed share holding patterns, lesser activism in the board under normal circumstances and an increasing dependence on contestability as a mechanism for effective corporate governance. This may encourage higher degrees of take-overs and amalgamations and drumming-up a psychological state in which management of perceptions becomes very important in the short-run. As the diversity of interests amongst the representatives on the board loom larger, there is an inevitable information asymmetry amongst the management, the employees, the investing institutions, banks, the government and the financial markets themselves. As the over-riding philosophy is to maximise shareholders' wealth, the approach to corporate governance would be driven by prudence to safeguard the share-holders' interest against possible risks of non-conformity with the laws of the land. This approach has to essentially fall short of ethical governance.
• On the other hand, the German and Japanese models have their peculiarities highlighted by large holdings by banks and other corporates/institutions, several possibilities of network/cross-holdings; relatively long-term orientation (thinking beyond one`s grave, as someone put it); the relative activism of the supervisory board (and the workers representatives in the German context) etc., The approach appears to be towards maximising a firms' value which is well founded in the very concept of corporates being unique and discernible entities by themselves.
• Though the Japanese and German models appear to be undergoing some changes, in their assumptions about the long-term value driven governance, it will be very long before any convergence can be hoped for between the British/American model and this one. In the Indian case, the corporate governance mechanisms appear to have the structural features of the British/American model, and a potential for easy adoption of a German/Japanese approaches, but in reality, heavily drawing on the problems and disadvantages of both. This is particularly so in the case of public sector which appear neither to maximise the share-holders wealth nor the value of the firm but optimize on entrenched interests which often may cause erosion of the value or wealth for the corporation as also the stake-holders.
• Need for Active Members of Board: Unlike the American model where the institutional investors (mainly pension funds and investment banks/funds) are markedly, short-term as well as aggressive in their fiduciary responsibilities, their Indian counterparts in the form of government and DFI's, are reportedly passive in governance. The mechanism of "contestability" is yet to take effect in India (the take-over code is perhaps mere seeding the process) and given the composition and profile of boards, activism is still a far cry. As per a World Bank Working Paper (Cherian Samuel - Stock market and Investment) "….. it should be noted that except for some infrequent forays into the market for corporate control, institutional investor activism in India is practically non-existent; more often than not, they vote with existing management and show no particular concern about the performance of a given firm in relation to the overall market and the industry".
• Collectives in Governance: Germany and some North European countries have truly believed in employee's participation in governance. Despite the mention in the Constitution and the multitude of forays in this direction, representation of employees has been resisted by all adducing some reason or the other. It is undeniable that Indian corporates, in general, are averse to collectives and they continue to be alienated. It is law in some countries to apportion several seats on the board to representatives of the employees. In several strategic industries such as Iron, Steel and Coal one-half of each supervisory board in Germany is from the employees with a neutral Chairman ( in others employers nominate the Chairman but the employees still have one-half seats). Lest this sounds merely ornate, the employees elect the Personnel Director in the Management Board. The countless issues that are normally raised to advance arguments as to why workers' participation is not feasible (non-confidentially, inability, inter-union rivalry etc.,) are mere pointers to the posture adopted than arising out of any objective analysis. It is indeed sad that even Public Sector units are not forthcoming in involving the collectives in the corporate governance. It is realised that Employee Stock Option Plan in the context of Disinvestment can be yet another opportunity for improving the governance structure for PSU's but being underplayed for several reasons.
• The Issues of PSU's: Though the public sector appears to be endorsing the Cadbury prescriptions in a general sense, the essential additionality yet to be grappled is the role of the government and its nominees in the governance process. It is recognised that public sector in most countries, particularly those undergoing economic reforms such as India, have several issues of transformational nature complicating corporate governance. Traditionally, the "principal -agent" issues have seemingly made public enterprises inefficient. Consequently, the strategies in most economies under reform have been to corportize (where such is the need); "marketrise" and privatise, in combination. These strategies particularly coming in the wake of managing fiscal deficits and de-regulations have suddenly shifted the profile of objectives for the public enterprises from the larger social responsibility to the narrow monetary. Though an essential shift, some could argue this as retrograde. As Richard Martineau commented "It is strange that just as the Government is imposing narrow mechanistic goals upon the public sector, often based on monetary values, the private sector is moving towards broader goals which accept far wider accountability... Concern for the environment and support for the community are just two of the growing list of factors by which a company may be judged." Such arguments as above do not sanctify the earlier policy regimes but show the need for rational shifts in both public and private sectors from their extremities in position. The public sector may not need to forsake larger goals and pursue the purely monetary goals, but possibly be far more pragmatic in its missions and goals vis-à-vis expectations of the stake-holders and the needs of long-term survival . As Lester Thurow argued, corporates must not assume social responsibility directly (for there are dangers of fascist forces) but must carry on their work efficiently and ethically. For, the business of business is indeed business. And, its accountability is to the immediate publics or stakeholders.
• Vast Diversity in Boards: It is the belief of executives that a typical board is too heterogeneous in profile of skills, comprehension, interests and does not lend itself to professional direction of the firm. It is felt that the interests of the stakeholders are rarely pursued well and the interest of the corporate itself is taken-up in driblets. Most Boards in the private sector are replete with indications of protecting sectional interests than objectively designed talent in the corporate interests. Even in the PSUs the board is a "weak institutional arrangement" (as SCOPE says), and the appointment of directors is mostly done on political considerations and not on professional requirements. It is strangely neither a two-tier system nor a single-tier model but is primarily a long-arm of the government with the board carrying out decisions such as those done by a management committee in private corporates.

SECTION II
ETHICS - THE SOFT SIDE OF CORPORATE GOVERNANCE

Centrality of Ethics: The criticism has been that the good house-keeping approach is probably necessary but has done little good by itself. World over, the subject of corporate governance has suffered from a disciplinary parochialism. The accountants, economists and lawyers have prepared good templates of systems and structures, both external to the corporation as well as internal. The sociologist and the behaviorist have initially tended to mix ethics with religion and deep-rooted values. Neither has served the necessary purpose as case studies are spewed with great gush on the breach of stakeholder expectations. What is required at this stage is a strategic approach looking at both the super structure as well as its practical functioning through human resource intervention. Ethics is flesh and blood to corporate governance, it gives life to the otherwise skeletal design.

Ethics is Gray: Ethics is a difficult subject which needs much training, much more reflection and even more positive determination. Unlike in several other countries, Ethics has not been a part of our formal management education and has not received attention in management development. With the result, we have a situation where ethics is often confused with morals, religious dicta and law. An appropriate attention to this soft issue becomes very important to ensure evident behaviors that would pursue corporate well-being and society's welfare. Ethics is essentially a "gray area" and represents the dilemmas that most of us face in our working lives. These dilemmas loom larger as one occupies higher positions in organisations. Where the tasks are standardised, the process defined and the input and output fairly transparent, the scope for non-conformity with society's expectations is that much lower. However, as an individual reaches policy levels, fuzziness creeps in and the discretion's in behavioral choices increases. The boards of directors are constantly dealing with issues, which could be controversial in their impact. Every decision is full of trades-off - short-term with the long-term; choices between expressing differences versus showing indifference; succumbing to external pressures versus risking one's extrinsic rewards.

Ethics and Directors: Ethics must have a strong and explicit bearing on corporate governance not merely because it is desirable, but, because it is central to the belief that most directors are professionals. A society comprises of several callings but only a few qualify for being called as professions. In a liberal sense, almost all occupations can be called professions, but when the reference is to a professional and professionalism, the connotation must get restricted. Professionalism ought to mean an effort at conformity with the high standard, codes, regulations and practices evolved in that profession through common experience which has, over the years, become theory. It is the practice of the theory through special education or training, and the related social conduct that makes a person a professional. At times, the procedures, processes or norms of conduct in that profession may get to be irrelevant, archaic or appear dogmatic - such situation only reflects the lack of vibrancy in the profession but is no excuse for individuals to do whatever they think is appropriate. (The malpractice of medial science evokes emotional response but in other professions, they are less dramatic though the degree of deviation may be far more).

Trusteeship in Boards: Despite several cynics, it is true that most actions in this society are honorable, just and ethical. It is the fraction in the multitude of every day actions that we find the aberrations. When such aberration gets concentrated in some segments of the society, the impact can be substantial. The directors of the board are those esteemed individuals with whom the social wealth has been vested with, and in whom the employees' future is reposed and corporate survival trusted with. In a Gandhian sense, these individuals are not merely repositories of professional skills and values but are truly the trustees of human welfare. This authority needs to be exercised with a high degree of sensitivity arising out of consciousness regarding ones' professional obligations and an intellectual capability to analyse the trades-off.

Demonstration Effect: The recent times have witnessed major scandals in the corporate world suggesting erosion of ethical standards. An environment where market system is God, consumer is king and bottom-line a hypnotic tantaliser, induces greater frequency of such actions and the current times promise this prospect. The absence of legal and social sanctions against such individuals and firms reinforces unethical behavior. The demonstration, in fact, has been that people in high places are unethical and it is necessary to be unethical to reach high places. The reflection of this logic is in the behavior of some of the newly recruited professionals. They assume lack of ethics and "pragmatism" as hallmarks of success and the pre-disposition is reinforced if leaders in organisations are seen to be unethical - they may provide the demonstration effect. As Peter Drucker observed, "Trees die from the top" i.e., from the boards down.

Institutionalising Ethics: There are several suggested methods for institutionalising ethics, of which, the following are the more prominent.
1. Appointment of an ethics committee, comprising of a few members of the board or management or both.
2. Appointing an ethics counselor who is the most acceptable, approachable and credible member of the top management or an advisor.
3. Adoption of a code of practice/value statement/or ethics statement.

Ethical Companies Are Also Well Governed: Case studies world wide have indicated that good corporate credos or value statements are of no avail by themselves (For instance, read the code of best practice recommended by Cadbury committee given in appendix). However, sensitization on aspects of ethics has increased better self-governance, transparency in actions and long-term corporate performance. It is not just a coincidence that the top-ranked companies in the world (Fortune 100) are also those which have been ranked very high in their ethical conduct. Companies such as Johnson & Johnson at the time of the now famous Tylenol crisis, have shown the manner in which sensitization to ethics has helped the company. Contrarily, the international case studies of Ford's "pinto"; the cigarette manufacturers' controversy; the ITT's role in South American politics; Nestle's baby food in Africa; the oil companies' dilemma in the erstwhile South African situation; the asbestos controversy etc., are worthy of deeper study. The Indian case studies have not been very prominent in publicity but a few case-lets prepared span both the public and private sectors and concern under invoicing of exports; avoidance of execise levy through queer interpretation; environmental degradation by gaining time through frivolous legal action etc., on the one hand and total adherence to environmental standards under most difficult conditions; aggressive canvassing for corporate ethics through internal communication, debates and questioning; giving scope to the collectives to raise ethical concerns etc., on the other.