By C.V. Baxi

Before embarking on a forecast of how companies are likely to govern themselves this millennium, I think we have to look at the historical evolution of the concept of corporate governance, and how the basic definitions will change (or not change) in the 21st Century. The firm can be viewed in many ways. In 1932, Berle and Means looked at it in terms of ownership and control; in 1937, Coase defined it in terms of transaction costs; and Almchian and Bemetz viewed it from the perspective of the agency costs theory in 1972.

It was only between 1979 and 1986 that the firm was first treated as a structure for governance. In 1992, Allen advocated the concept of the corporation as a social compact with a public purpose. And in 1995, Margaret Blair viewed the organisation as a set of institutional arrangements for governing and managing specialised investments made by the respective stakeholders.

These latter-day descriptions will continue to be relevant today. Given that, how should we define the concept of corporate governance in this millennium? Most definitions emphasise the legal aspects of governance: rights, privileges, and liabilities. The Adrian Cadbury definition simply lists corporate governance as a system or process by which companies are directed and controlled. This could well be the one we adopt for this century. And 2 issues that impacted corporate governance for most part of the 20th Century-the concept of limited liability, and the fact that companies in most countries were managed by the families that, in most cases, founded, and owned them-will continue to play a role in any development in the area of governance.

The theme of corporate social responsibility too is a legacy of the 20th Century. It had its genesis in the debate on industrial democracy that sprang up in the UK in the 1970s. Today, at the beginning of the 21st Century, there are several issues relevant to corporate governance: company law reforms, director's compensation, self-regulation, and the role of audit committees. Developments on the company law front, have traditionally, looked at corporate governance from the legal and financial perspective: the use and abuse of power by the company's directors, the responsibilities of the directors, and the rights of the shareholders. Even in the 1980s and 1990s, companies were advised to adopt information management practices that would enable them to share information freely with their stakeholders. This will remain a driving-force behind several corporate governance imperatives this millennium.

Equally relevant will be the conflict of interests between minority and majority shareholders. Investor-friendliness remained a marginal concern of corporate- governance initiatives in the 20th Century, but this is set to change in this millennium. The financial facet is well defined. Several models, like the Cadbury one (propounded in the first half of the 1990s), and, closer home, the Confederation of Indian Industry's (CII) code, laid out towards the end of the previous millennium look at issues related to reporting and control in great detail. More Indian companies will adopt these in the following years. Indeed, the desire to source capital by listing in exchanges abroad will force companies to adopt accepted accounting standards like the US GAAP (Generally Accepted Accounting Practices).

As boards begin to play an increasingly important role in the management of companies, 2 issues will need to be addressed by companies: one, what is the role of external directors? And two, how much should directors (both internal and external) be paid? Answers to these questions can be found in the Cadbury Committee's report, which highlighted the role of external directors in improving the overall performance of the board, and the Greenbury Committee's Report in 1994, which defined the role of the remuneration committee (which would decide how much directors were to be paid), and made it accountable only to the shareholders of the company.

Although some aspects of corporate governance can be quantified, most can't be. This is where self-regulation will play an important role in the corporate governance arena this millennium. As suppliers, potential collaborators, investors, and customers start rewarding companies with good corporate governance practices, companies will realise that governance can be a source of competitive advantage. This will increase the importance of self-regulation.

Companies that wish to adopt a code of corporate governance can choose from several models that have already been made available by institutions as diverse as the World Bank and the International Corporate Governance Network. These will help companies address issues that are related to the composition and role of the board, the preferred level of disclosures and transparency, the role of audit and compensation committee, accountability to shareholders, and corporate ethics. Indeed, some of these models include the finer aspects of corporate governance like defining the mission of the modern corporation, and describing its societal imperatives. One crucial aspect of governance is investor-friendliness. Companies will have to focus on understanding the expectations of diverse groups of investors and constantly communicate with them.

What is the Indian context at the beginning of the millennium? Both the CII and the Securities & Exchange Board of India have stressed the relevance of accounting standards, transparency of information and decision-making, and a wider range of financial and non-financial disclosures. In the Indian context, financial institutions, will have to define their roles clearly. They could well be the conscience-keepers of the organisation.

In this century, companies, institutions, and consultants should approach the problems related to corporate governance in India from the perspective of their sources and nature. Issues related to ownership and control in family-managed companies need to be sorted out. There also needs to be a consensus on the ideal governing structure for public sector companies where the boards, thanks to a large number of controlling authorities, have been rendered irrelevant. The importance of corporate governance will be a function of the constituents involved in developing a uniform code. This could be the government. Or it could be market institutions. But the process and the content of this exercise is extremely important.

C.V. Baxi  is a professor at the Management Development Institute

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