Volume 18, Number 1 Article by Pradeep Banerjee March, 2006
Corporate Governance, Economic Reforms, and Development – The Indian Experience : Edited by Darryl Reed and Sanjoy Mukherjee, Oxford University Press, New Delhi, 2004, pp. 270, Price: Rs. 595 (cloth). :
In contrast to the earlier years of xenophobic exclusion, globalisation has in recent years become so pervasive that national economies have become embedded in each others’ production processes. As such changes gain momentum, what is of concern is that the transformation has been coupled with the subsumption of national factors of production, which could lead to the endorsement of the immediate interests of transnational corporate bodies at a cost to the vulnerable developing economies.
This concern being an important one, the book under review focuses on examining the intersection of two particularly significant areas where change has been taking place over the past two decades – the manner in which corporations are governed and the efforts of developing countries to promote development. While traditional approaches viewed the two areas as independent of each other, and have studied them exclusively, they are in the real world interlinked through the process of ‘economic reform’. The editors hold that there has always been some relationship between corporate governance and development ‘as the manner and substance of corporate decision making has significantly affected the development process’, although the impact of the relationship may be muted by interventions of the state. The state deflects criticism of corporate practices for absorption elsewhere and in particular by the bureaucracy and the political elite. What, however, was possible in an inward looking import substituting economy is difficult to practice in an economy that is marked by increasing liberalisation and withdrawal by the state from direct participation in economic development, which necessitates the creation of an environment that actively promotes responsible corporate behaviour. The truncated responsibility of corporate behaviour is correspondingly enlarged to provide for a larger role in the economy.
The gradual withdrawal of the state from production processes is expected to favour the emergence of efficient units in the corporate sector with consequential benefits of economic growth in general and growth in employment in particular. To enable the macro economy to perform in this manner, individual corporate units at the micro level need to convert themselves into efficient units with an ability to turn out quality goods at acceptable prices. To do this, corporate boards need to be involved with functional management and structure their firms to deliver on expected lines. In this perspective, the economic reform process is seen as a catalyst, bringing in changes in the nature of corporate governance and introducing a new development strategy; and private corporations are endorsed as vehicles, even as primary agents, of economic development. The underlying position of this approach is one of closer alignment of the development strategy with that of private capital.
The adequacy of such an approach to address real life issues is however debatable. A failure to deliver tangible results on the development front could have adverse effects on the population that is targetted to benefit from the adoption of this approach. Determining the effectiveness of the approach is a complex task, involving a host of questions that can be categorised as normative, positive, and strategic. The normative part refers to the definitional aspects of development, including the roles and responsibilities of those charged with delivering the process of development. The positive (social science) questions are concerned with the causes, emergence, content and outcomes of economic and corporate reforms during recent years. The strategic questions assess the effectiveness of strategies and tactics adopted in the practice of reforms. The text does not attempt to address all these questions, but is rather ‘intended as a preliminary step in the investigations of these issues in the Indian context’, while focusing primarily on analysing the positive aspect of the economic reforms. Based on evaluative studies, the scope of the text has been expanded to include prescriptions for corporate boards to ensure delivery in compliance with corporate responsibilities.
The book begins with a lead chapter tracing development technologies adopted by the state over time against the backdrop of changes in the area of corporate governance. While development technologies moved from import-substitution industrialisation to sector specific liberalisation, the move forward in corporate governance was progressively in favour of adoption of the so-called Anglo-American model of corporate governance. The state evolved from a Keynesian Welfare State model positioned to manage aggregate demand, aggregate investments in various sectors, full employment, and the promotion of a range of societal welfare measures to a Schumpeterian Workfare State with different intervention patterns in terms of economic and social policy practices. The economic policies of the Schumpeterian Workfare State are ‘focused on the promotion of innovation-driven structural competitiveness’, while the social policies are ‘designed to enhance business flexibility and competitiveness in a global economy’. In addition, the domestic economy is also impacted by international economic orders and associated international relationships.
These changes in the economic structure of developing economies precluded both an import-substitution regime and a predominantly export oriented one, leading to the opening of domestic markets and larger participation by global firms in domestic arenas. Private corporate units can now look for support from external sources both for establishment of new units and for expansion of established units. Along with the inflow of investment capital that has been used for long-term asset formation, globalisation has induced inflow of finance capital for portfolio investment too. These developments have fundamentally altered the relationship between the state and private capital, necessitating a new set of rules of governance (covering the firm at the unit level, the state at the supra level, and the global economy at a pan state level) to enable the state to meet its objective of economic development. This is the platform on which the objectives of economic development and the practice of corporate governance have been brought together, creating the context for the rest of the book.
The next chapter traces the history of corporate governance, from the managing agency system in practice during the colonial period to the post independence Business House model of private capital functioning, and the Anglo-American model that resulted from the spread of private capital and the arrival of many in the space previously occupied by a few. While these models of governance have had the legal support of the state, and the relationship between the state and business has been a cordial one (as substantiated by a number of case studies), the relationship has not been productive enough to produce results of the type seen in say South Korea. The text, while allowing for differences in the political set up and political management practised by these two states, proposes an interesting explanation for this difference in results: business units in India have been driven by seeking rental income rather than economic profits.
The focus of the following chapters is on aspects of governance at the level of corporate units. With corporate governance at the input stage, these studies evaluate firm outputs in the context of development attributes that are posted by the state as desirable goal posts. An early chapter deals with the manner in which economic reforms impact corporate practices and the need for companies to provide for stakeholders along with shareholders. Corporate governance practices can either be mandatory, as incorporated in reportage of specific performance, or prompted by events in the economy. Another essay deals with corporate philosophy. The corporate philosophy adopted by a company needs to be consistent with emerging economic changes, and hinges on the need for discharging activities in terms of the ‘common good’ of society through a mix of core business activities with those of social responsibilities. This will ensure that business has a positive developmental impact, which is the objective of the state. The state in turn has developed certain mechanisms to propel corporate units into following norms of governance. These mechanisms range from the Companies Act to the appointment of nominees to the board of directors. Given the mixed response of corporate units in relating to these requirements, the recommendation is for more active compliance. Failing this, both mandatory and recommendatory practices end up being less than effective.
The Indian business scenario has recorded instances of failure in corporate governance of both the non-compliance type and the inadequate compliance type, confirming the need for better frameworks, especially in the context of a globalising economy. For instance, a corporate unit seeking external finance capital as part of its equity, or loan funding, needs to subscribe to reporting standards prescribed by that country. Similarly, enabling inflow of funds into portfolio markets requires domestic units to subscribe to certain standards of governance.
The book includes essays that see a much larger role for corporate units in terms of social and economic development. Societal participation is an important way for corporate units to relate to stakeholders, either by themselves, or by associating with non-governmental agencies who work with the stakeholder population. The experience of a business house that has made serious efforts to reach out to stakeholders has been cited to show how such participation can benefit corporate units.
Relating corporate governance to economic development offers a relevant area of study. The approach brings in the state, business and society in one related framework and by doing so offers an enlarged frame of reference. This will remain an area of much activity in the coming years as well. The essays in this text will be useful reading for researchers working in the areas of the role of the state, corporate units and economic development.
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