The recent growth in corporate governance literature has focused on ways that corporations work. Firm behavior was earlier modeled on the argument of the neo-classicists who asserted that firms are nothing more than production counters. All activities of the firm were geared so as to maximize profits. Finance literature in particular came a long way in explaining the various financial theories of firms and the behaviours associated with them. With the increasing understanding that mere economic and production based explanations do not exhaustively describe the motivations for governance, researchers have focused on the behavioral side of firm performance to justify the economic rationale of such typical behaviors.

The foundational argument of corporate governance as seen by both academic as well as other independent researchers can be traced back to the pioneering work of Berle and Means (1932) who observed, as early as the 1930s, that the modern corporations having acquired a very large size can create the possibility of the separation of control over a firm from its direct ownership. Erstwhile promoters who largely controlled and managed their organizations increasingly needed specialized skills. Professionals with the required skill-sets were to be hired. Berle and Means’ observation of the departure of the owners from the actual control of the corporations led to a renewed emphasis on the behavioral dimension of the theory of the firm.

The modern day uproar over corporate governance problems of insider trading, excessive executive compensation, managerial expropriation of shareholders' wealth, false reporting, non-disclosure of certain accounting and governance malpractices and self-dealing among others, are assumed to be related to the theory of separation of ownership and control.

Theoretical interest in corporate governance in India is a recent phenomenon. It is a result of a spate of corporate scandals that shook the country during the early liberalization era (Goswami, 2000). Obscure companies quickly listed on the exchanges during the stock market boom of 1993-94 only to disappear after siphoning off public funds and leaving the retail investors with illiquid stock. The sudden appearance of fly-by-night operators during the period coupled with the emergence of a new breed of shareholders like the foreign investors, institutional investors, mutual funds and private equity placement companies and their demands for better governance practices has compelled the policy makers to think of the governance anomalies in corporate India.

Before the onset of liberalization the Indian organized sector dominated by public and private enterprises did not meet the expected norms and standards of governance. Both the public and the private sector enterprises were bracing themselves to meet the challenges of globalization. Moreover, with increasing foreign investment in Indian industries, accountability to foreign shareholders had become an increasing necessity. With the institutional investors emulating the practices of their counterparts from developed economies, better governance practices had to be adopted for such organizations to sustain themselves in the economy for longer periods.

The demands of financial liberalization, it appears, have helped in imparting greater control to the banks in their operations Responsibility has now been totally fixed upon them for any likely loan losses (D'Souza, 2000). This has led to banks now extending external finance in lieu of some control rights, apart from their regular pecuniary priorities. Since the structure of corporate finance in India is highly dependent on bank's financial resources, some authors argue that the legal structure should be so developed that banks are freed from excessive portfolio restrictions and governance mechanisms be so devised that bank representations on boards become a reality. This would enable banks to maintain proper checks and balances apropos of, expropriation of shareholder value by the managers.

Varied opinions were articulated in India in response to wide ranging corporate scandals like violations of foreign exchange regulations, making clandestine payments to politicians, involvement in illegal activities and unethical deals by the top industrial houses (Godbole, 2002). While some suggested that the investigations might scare away the foreign investors and the economy would once again be in tatters, others stressed on the importance of social responsibilities of business. However, not until the groundwork done in terms of preparing a code for corporate conduct by the Confederation of Indian Industries (CII) in 1998, was the importance of corporate governance officially realized. The code was prepared with the view that Indian companies had to adopt the best of corporate practices if they were to access domestic as well as foreign capital at competitive rates. The code agreed that there was no unique way of understanding corporate governance. Different structures established in different countries might not be pertinent to local conditions. With increased exposure to global markets it became imperative on corporations to focus on transparency and adopt full disclosure mechanisms apart from consistently directing themselves towards amelioration of shareholder value. The code initially focused on the public listed companies.

Corporate governance practices have gained a greater impetus after the adoption of the much-celebrated Securities and Exchange Board of India (SEBI) appointed Kumar Mangalam Birla Committee (KMBC) Report on Corporate Governance. The acceptance and ratification by SEBI in early 2000 of the KMBC report on corporate governance has paved the way to rationalize and restructure governance practices in corporate India. The SEBI report was a timely intervention to keep a tab on the uninhibited corporate misdemeanors rampant in India. The recommendations are supposed to be enforced through provisions in listing agreements by local stock exchanges where the companies are listed.

However the report does not bring under its purview unlisted firms, which are mushrooming rapidly. Moreover, given the illiquidity of most of the firms in stock exchanges, stronger listing norms do not have any necessary material effects if such firms do not adhere to the mandatory disclosure norms. Only companies that are in the highest bracket and that trade voluminously are affected by such norms and hence try to abide by them.

The new recommendations have forced a dramatic alteration in the disclosure norms for closely-held firms or family-dominated firms. Demands made by the report of certaindisclosures and the mandatory setting up of the recommended sub-committees will strike a hard blow on majority of the listed firms. The mandatory nature of the recommendations, whose failure would invite strict action by the local exchange, will compel a firm to make disclosures despite a seeming reluctance.

The existence of a reasonably strong financial press in the country has paid dividends by obliging the law-enforcing bodies to be extra vigilant. For the past few years the press has been buttressing the need for disclosure through its financial analysis and revealing stories of corporate misdemeanors. Overall, it can be said that corporate governance as a concept is slowly seeping into the Indian business practices, whatever the compulsions of avoiding it may be. The pace at which corporate governance practices are being adopted by the industry does however cast a doubt on the intentions of both the regulators and the industry. The practical difficulties of adopting transparent mechanisms that would remove the veil of accounting practices that firms have so far adopted has led to the slow acceptance of corporate governance norms. Nevertheless, for reasons mentioned above, it is clear that the adoption of better governance practices cannot be done away with because the costs attached to non-compliance to global standards would take a heavy toll on those firms that would want to be long-term players.

Contact: mpbhasa@iitb.ac.in (*Ph D Graduate of Shailesh J.Mehta School of Management)