Corporate Governance in Private Companies
Introduction
The role of regulatory body in a country is determined by the stage of development of the regulated and the expectations from such regulated sector and to develop self-regulation, today’s corporate world is all about Corporate Governance and private companies cannot prevent themselves from being affected from this. Rather, they are trying to be part of this growth and development phase and constantly improving their quality and efficiency.
According to Ulrich Steger, IMD professor and holder of Alcan chair of Environmental Management[1] “Corporate Governance in Private Companies can add value and that the importance of PECs (private equity investment companies) is ever increasing. Everybody can be bought–so board members, CEOs and senior executives should be aware of the higher complexity of governance in a PEC. Institutional investors drive the corporate agenda in the stock market, but in family and private businesses it is clearly the private equity funds who are in the driver’s seat.”
Moreover, according to a Report of PricewaterhouseCoopers[2], “30% per cent of America’s fastest-growing private companies expect to benefit from provisions of the Sarbanes-Oxley Act, according to a US survey of 341 CEOs. A further 31 per cent said the Act had an impact on their business, while CEOs are improving their control documentation and testing, updating governance procedures and strengthening their code of conduct or ethics via:
- Improving control documentation and testing: 64%
- Updating governance procedures: 53%
- Strengthening code of conduct/ethics 50%
- A further 35 per cent are adopting best practices procedures while 22 per cent are updating or adding whistleblower policies[3].
Also, according to Mondaq business breifing[4], while private companies are outside the scope of both Sarbanes-Oxley Act and the CSA Rules[5], some progressive private companies are using these developments as a catalyst to examine their own accounting, internal audits, checks and balance systems.
In India, in public companies, since public interest to a large extent is at stake, hence heavy and large disclosure norms are to be complied with. It seems that in private companies, even though public interest is directly not affected, but to a large extent interest of stakeholders is involved[6] (Also, due to boom in Indian market, it is apprehended that small unscrupulous public sector firms are trying to play with investor’s money by putting them in unscrupulous private sector companies controlled by them and hence public interest in this boom period is also involved here), it is for this reason that Department of Company Affairs, as a regulator, should impress on and is impressing on disclosure and fair practices for private companies coupled with investigation into records or the private companies to, at one hand prevent the stakeholders interest, and promote the growth or such companies in a transparent manner and this, although not to a large extent, but surely is a part of corporate governance for the private companies.
Here, the noteworthy point is that the definition of oppression is developed to a larger extent and it has come down from meaning an “imminent danger” to mean, “lack of fair dealing or fair play”[7] and lately the courts have included almost every departure, which is not in interest of the stakeholder, in this definition.
This can be substantiated from the article of William P Dukes et al who states [8] “A role of Board of Directors in a private company is vital for mitigating principal (stockholders) and agent (managers) conflicts arising from separation of ownership and control. In private corporations, there is very little need for the board to monitor the performance of top management for two reasons. First, the top management consists mostly of the stockholders themselves. Second, most of the times there would be duality between membership on the board and the management team. It was observed that outside members in the board, not restricted by family or personal loyalty, are extremely effective in training the presidents of their firms to be better administrators and the most important value addition is done through benefits in strategic planning and their ability to see a different perspective.” Hence, the board members can prove to be resource providers by having higher proportions of outside directors which helps the corporation to formulate financial policies with respect to raising capital, debt management, dividend policy and maintaining the level of corporate governance.
Hence, with the development of strong private sector and need of corporate governance the DCA, as a regulator, is pressing upon the need of corporate governance, although a milder version, but effective one, on the private corporations and the private corporations too are responding positively to the same since these yardsticks help to improve their performance also and inbuilt a mechanism of self regulation in private companies.
[1] The IMD Webletter, Corporate Governance in Private Equity Companies: Can it add value?, 22 June 2005, http://www01.imd.ch/imdwebletter/
[2] Human Resources, September 23 2005, corporate governance is a private matter, http://www.humanresourcesmagazine.com.au/articles/23/0C034F23.asp?Type=61&Category=888
[3] VC experts, Impact of Corporate Governance Reforms on Private Companies (Hale and Dorr), http://vcexperts.com/vce/library/encyclopedia/documents_view.asp?document_id=1194
[4] www.findarticles.com, Corporate Governance and Private Companies, Mondaq business breifing, September 2004
[5] Corporate Governance rules of Canada
[6] Second Naresh Chandra Committee Report on Private Companies, http://www.manupatra.com/downloads/Report%20of%20the%20Committee%20on%20Regulation%20of%20Private%20Companies%20and%20Partnership%20(Naresh%20Chandra%20CommitteeII)/Ch%20II%20Private%20Companies.htm#, as visited on 22 September, 2005
[7] Kalinga Tubes v. Shanti Prasad Jain, AIR 1965 SC 1535
[8] ICFAI Journal of Corporate Governance, July 2004 by William P Dukes et al, The ICFAI University Press, pp. 32-47
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