CORPORATE GOVERNANCE.

Today virtually every industrialized nation is seriously

engaged in defining the kind of “corporate governance” that
should be put in place to manage the economic activities.
Corporate governance has evolved in to an umbrella term
that encompasses the economic, legal & institutional effort
that allows companies to diversify, grow, restructure & exit
all in order to maximize the shareholders value. It deals with
the ways through which suppliers of finance to corporation
can assure themselves of getting a return on their
investment. As the Nobel laureate Milton Friedman
observed, corporate governance has today become much
more than the conduct of business in accordance with
shareholders desires. However, corporate governance
doesn’t appear to have yet taken roots in the Indian
insurance companies.

Defining corporate as “a complex web of contractual

relationship among the various claimants to the cash flows of
the enterprise”, one school of thought argues that the
fiduciary duties of managers & directors of companies
should not only confine to maximization of the firm value for
shareholders but also extend to ensure safety & soundness
of the enterprises. This argument obviously expects
corporate to become powerful economic entities & important
social institutions that use its economic power to add value
to society in general & peoples lives in particular. This new
moral contract between the corporate individuals & the
society is essentially aimed at transforming the corporate as
value-creating institutions.
 WHY CORPORATE GOVERNANCE?

No better reasoning could be advocated for corporate

governance than what Adam Smith so aptly put it almost 250
years back. Directors of companies, however being the
managers rather of other people’s money than their own, it
can’t well be expected, that they should watch over it with
the same anxious vigilance. Negligence & profusion
therefore must always prevail, more or less, in the
management of the affairs of such company.
Exactly after 150 years, Berle & Means (1932) have
echoed similar feelings: control will tend to be in the hands of
those who select the proxy committee is appointed by the
existing management, the later can virtually dictate their own
successors. Modern economists, too are forthright in their
assertion that managers don’t always act in the best interest
of shareholders. Against this backdrop corporate
governance has emerged as a tool to handle agency
problems & their by ensure that managers will act in the
interests of the shareholders.
This intellectual debate has in the recent past raised a
question: whether corporate governance should focus
exclusively on protecting the interests of equity claimants in
the corporation or whether corporate governance should
instead expand its focus to deal with the problems of other
groups called non shareholders constituencies.
CORPORATE GOVRNANCE: CURRENT STATUS.

A greater chunk of insurance business in India being

public owned, the CEOs are often found accountable to
political institutions, but not to economic institutions, the
board of directors. This dichotomy is resulting in sub
optimality in corporate governance

Indeed as Prasanna Chandra, the corporate

governance in Indian in public sector undertaking is a
‘transient system’ with the key players, viz., politicians,
bureaucrats & managers taking a myopic view of things for
which anyone of the following could be a reason:

• The boards of public sector undertakings, appointed for

all practical purposes by the controlling administrative
ministry, brings with it a good deal of political &
bureaucratic influence on the management. As a result
the autonomy of the management is often found
substantially eroded.

• Public sector undertakings are subjected to the CAG

audit & are accountable to parliament. This leads to an
excessive emphasis on observing rules, regulations, &
guidelines & thus efficiency & performance are often
sacrificed at the alter of propriety.

• Chief executives of public sector undertakings have

short tenure, coupled with limited freedom, leads to a
myopic outlook. It is a rare to find a visionary leader
guiding the destiny of a public sector undertaking with
a long planning horizon.
• The performance standards in general are soft,
compensation levels are low, incentives for
performance are poor & ‘real’ accountability is truly
weak.

Over & above this, insurance companies in India

are the most regulated businesses as is the case all
over the globe. In fact, the IRDA regulates most of the
financial activities of these companies, including kinds
of investments that a company can make from its
premium income & exposure norms. They are also
required to constitute investment committees
comprising two non executive directors, the principal
officer, chiefs of finance & investment divisions & the
appointed actuary. The committees decisions should
be properly recorded & made available for inspection
by the officers of the IRDA.
HOW TO ACHIVE A GOOD CORPORATE
GOVERNANCE.

The board of directors leads & controls a corporation &

hence it must be constituted with members possessing
competencies to govern it. Competencies shall include
strategic perception & decision making, ability to plan,
delegate, appraise & develop others, focus on achievement
via risk taking, commitment to fiduciary duty & being bold
enough to blow the whistle when strategies go wrong. The
board should take responsibility for:

• Approving a core philosophy & mission.

• Monitoring & evaluating corporate performance.
• Monitoring & evaluating corporate strategy.
• Reviewing & approving material transactions not
in the course of ordinary business.
• Determining executive compensation.
• Evaluating senior management performance.
• Managing executive director/ CEO succession.
• Maintaining legal & ethical practices.
• Communicating with shareholders.
 • Maintaining transparency.
• Evaluating board performance.

The board should also be able to place top

management endowed with such qualities as: ‘Thought-
man’; ‘action-man’; ‘people-man; ‘front-man; an all-in-one
package.

The Chairman of the Board is the public face fo the

company. He should assume responsibility for the agenda
and ensure that nothing important is missed, and nothing
trivial included. He should be able to foster effective
decisions and reverse failed decisions. He should also aim
at creating an exciting and invigorating work climate, in
addition to ensuring transparency in
investments/disinvestments, important appointments etc.