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Transparency is often just as effective as a rigidly applied rule book and is usually more flexible and less expensive to administer. By Gary Hamel Corporate governance in private limited companies is an often-ignored topic as it is not mandatory by law. The Companies Act and SEBI Listing Agreement focus on corporate governance aspects of public listed companies. The reason for excluding private limited companies is that they do not have numerous shareholders hence the risk is minimal. I beg to differ. Corporate governance encompasses much more than shareholder rights. Corporate governance includes rights of investors, financial institutions, customers, suppliers, employees and society. Let us first cover the backdrop of the problem briefly. In India, 90% of the companies are either unlisted public companies or private limited companies Private limited companies fall under three groups 1) private companies belonging to business families; 2) private companies as subsidiaries of listed Indian public companies; and 3) private companies as subsidiaries of foreign companies. The corporate governance is limited in 1st and 3rd categories as in the 2nd category the provisions of listed companies apply to quite an extent. In the second category, it is dependent on the owners to take the initiative. The biggest challenge is for 3rd category as holding companies provisions may not be applicable in India. However, they are applicable in the country of the holding company. If the holding company is listed then corporate governance aspects apply of the relevant country. Though, quite frequently the focus in the subsidiary company is not the same as holding company. These companies sometimes have turnover and employees more than the listed organizations. Still these are not covered in the regulatory ambit. The Institute of Companies Secretary of India has issued recommendatory guidelines for it. The Companies Bill, presently awaiting parliamentary approval does cover the same. This definitely is a step in the right direction. Organizations must take first mover advantage to incorporate the provisions in their governance, risk management and compliance programs. I am giving below five areas that they can focus on:
1.
In 2009, Ministry of Corporate Affairs (MCA) issued voluntary guidelines for Corporate Social Responsibility (CSR). The guidelines discuss key aspects of governance practices that business organizations need to focus on. The policy covers six aspects- 1) Care of all stakeholders; 2) Ethical functioning; 3) Respect for workers rights and welfare; 4) Respect for human rights ; 5) Respect for environment; and 6) Activities of social and inclusive development. The policy requires that business entities should provide an implementation strategy covering projects, timelines, resource allocation etc. Organizations to communicate their commitment to CSR can put the policy on their website with each locations implementation strategy. This will help communicate organizations ethical stance to all third parties wishing to do business with it.
5. Appointment of Auditors
Auditors in family owned companies are sometimes appointed based on old business relationships. This practice in India, significantly affects the independence of the auditors. In respect to subsidiary companies, Indian and foreign companies, auditors are chosen by the holding companys management. In most cases, the holding companys auditors are
appointed for confidence in consolidation of financial statements. Although this is a good practice, in Indian context there is a small snag. Local relationships with the auditors might circumvent the independence. Hence, if local management is involved in frauds, the auditors may compromise in ethical reporting. It is a good practice to frequently call on the holding companies audit partner and advise him/her on the issues. Direct relationships with international partners put a check on local auditors.
Closing thoughts
In India, corporate governance practices are just a little over a decade old and mostly focused on listed public companies. In private limited companies, it is still in nascent stage. Organizations however can voluntarily take the initiative to adopt best practices. This improves confidence of third parties and brand reputation. It also benefits if the organization in a few years is planning to turn public limited or plans to sell the company. References: Ministry of Corporate Affairs (MCA) Corporate Social Responsibility (CSR) Voluntary Guidelines.