By N.R. Narayana Murthy

The primary goal of a corporation is to maximise shareholder-value in a legal and ethical manner. There are 3 constituents involved in corporate governance. First, shareholders who trust the corporation enough to invest time, effort, and money in it. Second, the management that runs the company, and reports to the directors. And third, the directors, who are responsible only to shareholders.

I believe that there are 4 key assumptions that hold true for all well-managed corporations across the globe. First, the ability of a corporation to sell its products and services and earn a market rate of return on capital is a good indicator of its efficiency and effectiveness in the marketplace. Second, the sole interest of the owners-the body that comprises every shareholder of the company-lies in optimising the return on their investment. Third, if the company's performance, or lack of it, can be traced to an under-performing management, the preferred alternative requires owners to make way for alternate management and ownership. And, finally, the corporation is a joint-stock company. Companies that wish to adhere to the highest principles of corporate governance should treat these 4 as axioms-not mere assumptions. In essence, corporate governance is all about conducting the affairs of a company in such a way as to ensure fairness to customers, employees, investors, vendors, the government , and society at large. This definition of corporate governance transcends the traditional narrow one which defines the concept as fairness to investors.

The Indian corporate sector was, for long, dominated by family-owned businesses as opposed to professionally-managed corporations. That apart, the licence-raj resulted in high governmental interference in the day-to-day affairs of most companies. These factors did not encourage adherence to strong corporate governance norms. However, several business imperatives will drive the move towards higher levels of corporate governance in the 21st Century.

One, as India moves down the path of globalisation, companies may find themselves short of capital. One way to address this shortage could be sourcing global capital by way of ADRS, GDRS, FDI, and financing by way of debt. To do this, there is no alternative except to subscribe to the highest standards of corporate governance. Two, thanks to liberalisation and ensuing global competition, Indian employees have global opportunities and, consequently, global aspirations. The only way companies can retain their best employees is by treating them with dignity. Three, as a result of competition, customers have choices. And they could well prefer organisations which they perceive as maintaining the highest level of transparency in all customer-interactions.

Four, vendors and strategic partners are unlikely to work with a company which is not transparent in its dealings with them. Five, the government, in an indirect sort of way, provides an excellent reason to practise good corporate governance. It has reduced the corporate-tax from a punishing 97 per cent in the late 1970s to 35 per cent today. The government did this to encourage compliance, and get companies to pay taxes. Unless companies pay taxes, the government has no reason to slash the corporate tax-rate further. And, at one level, corporate governance is all about tax-compliance.

The final reason concerns society. This millennium will witness an increase in the gap between the haves and the have-nots. Companies will have to find a way to involve the have-nots in their business. If companies continue to function without any concern for the macro-environment in which they operate, the result could well be anarchy. This is another level at which corporate governance will operate. What role do owners have to play in corporate governance? Essentially, they need to bring about an attitudinal change in themselves, and identify with the aspirations of each stakeholder. They should adhere to the principle of looking for the public good-private good will, automatically, emanate from that.

One way in which organisations can improve their standards of corporate governance in the future is by focusing on how they choose external directors. The latter need to be selected purely on the basis of their experience and expertise. Companies will have to work on making their boards more independent. This can be achieved by creating a Nominations Committee, comprising only external directors, which will decide on the composition of the board in terms of choosing external directors as well as the employees who are ready to be promoted to the board. Only shareholders or the Nomination Committee should have the power to remove external directors. Another critical director-level committee is the Audit Committee. This should comprise only external directors with the authority to appoint external and internal auditors. The third panel that will have a role to play in the future is the Compensation Committee, which determines the compensation-package for the members of the company's board. This should also include only external directors. This committee should decide the quantum of this variable every quarter. And the parameters they use in this process should be defined by the shareholders.

The 21st Century's corporate governance template also defines a role for shareholders and financial institutions. Shareholders should be involved in all major decisions; all special resolutions need to be approved by them, and the company should send them not just the annual report, but also quarterly financial reports. The financial institutions should, if needed, appoint functional experts to represent them on the boards of companies in which they have substantial holdings. However, there should be a Chinese wall between their investment and mutual fund arms. And they should publish, a corporate watch list of all companies in which they have invested-in terms of Economic Value Added, or market-returns. And subscription to the Internal Accounting Standards is another area of importance.

The role of the government will be to define the quality of information that the management has to share with its board and shareholders. It also has to define the level of transparency that is expected in all financial and non-financial reporting. In conclusion, good corporate governance is a state of mind. It cascades from a set of core values that need to be instilled at all levels of the organisation. In my opinion, the values on which good corporate governance is based are time- and context-invariant.

N.R. Narayanamurthy is the Chairman of Infosys Technologies

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