History and Corporate Governance

The Arthashastra (Penguin classics)Though the terms governance, good governance and corporate governance is increasingly used in development literature since recent times, the concept of governance is not new. It is as old as human civilization. The eastern civilization has enumerable examples, where in emphasis was laid on good governance. The activity of the government of the state, as envisaged by the great eastern thinkers on polity relates to all aspects of human life, social, economic and religious. Peace, order, security and justice were regarded as the fundamental aims of the states (the largest form of corporate). State was considered a means to the realization of decent, good and meaningful life and justice were regarded as the fundamental aims of the states (the largest form of corporate). State was considered a means to the realization of decent, good and meaning full life.

Manu, the son of Prajapathi was the first king who brought out a comprehensive code of conduct or governance for men, society and the state as a whole in his treaty called Manu Dharma Shastra. In Mahabharata while delivering his first formal discourse on polity Bhisma says in equivocal terms that the kin should always put the interest of his subjects over that of his own. The great political thinker of 3rd century BC namely Kautilya in his treaty Arthasastra has laid down the ideals at which the king was expected to aim.

In eastern literature a good society is one wherein a high, ethical standard of life is characterized by the pursuit of wealth, enjoyment and liberation. It is the prevalence of dharma, which characterizes an ideal society. Such a society is possible if the governance of the country is based on clear, efficient and effective administration and all the rulers aim at this goal in the ancient times.

The First Great Political Realist: Kautilya and His ArthashastraHowever people in the west started feeling the need for good corporate governance in early 80’s as the corporate misdemeanours increased. In U.K., in 1980s, the corporate sector was beseeched with a number of problems. Business failure, limited role of auditors, weak accounting standards culminated in loss of control. The Cadbury committee was set up by the London Stock Exchange to address the dreary financial aspect of corporate performance. A few years later, director’s pay became such a live political issue that a study group on director’s remuneration was formed under Sir Richard Greenbury. Then came two other committees – the King Committee and the Hampel Committee to diagnose the issue of corporate governance.

The Asian financial crisis, recent scandals in US, Italy, India have triggered fresh initiatives of thinking towards good governance. Corporate governance has been much talked in India particularly after 1993. Liberalisation brought in its wake a spate of corporate scandals, the first of which was a bank scam involving securities. CRB scam and the UTI episode made it very clear that a serious thinking is required on the front of corporate governance. SEBI in India has taken the initiative in framing new rules and laws to strengthen corporate governance. Committees like Kumar Mangalam Birla Committee (2000), Naresh Chandra Committee (2002) brought out reports on corporate governance. SEBI has also constituted a committee on corporate governance under the chairmanship of Sri N.R. Narayana Murthy.

Presently corporate India is going through a great churning phase, as companies are doing business with global ambition, placing a lot of emphasis on governance and transparency.