Disclosure norms in BSE sensex companies

Abstract

Corporate Governance (CG) has taken a centre stage in lot of discussions mainly after economic liberalization, and deregulation of industry and business and opening of world economies.The manipulations and financial fraud done by Ramalingam Raju, proved disastrous for the software giant Satyam, the investors, employees, stakeholders and above all the goodwill of the nation. Price Water Coopers, the audit firm was also said to be a party of this fly-by-night deal and produced a adjusted balance sheet to suit the dark designs of Raju, so, good CG is a necessity in the present corporate world to build the confidence of the stakeholder, employees, and interested groups of people. This research primarily focuses on the codes of CG in in Indian companies. Particularly, in case of India, it is most important because India is one of the fast growing economies of the world. The corporate sector in India remains changing and moving ahead as per the developments that are taking place in other counterparts and developed economies like the US, the UK and other parts of the corporate world. The infamous collapse of Enron in 2001, one of the America s largest and celebrated companies, has compelled the world to focus their attention on corporate frauds and the role that a strong CG needs to play to prevent the frauds to happen (Solomon, 2007). The US enacted the Sarbanes Oxley Act (2002) in response, while the UK responded by producing the Higgs Report (2003) and Smith Report (2003). In India, the CG movement gathered momentum after the publication of the report of Confederation of Indian Industry (CII) on desirable code of CG in 1997. India took its first step towards market-based economic governance in the year 1991 when Indian economy was liberalized. The period that followed witnessed the development of largely market-based financial sector reforms. These financial reforms changed the economic landscape of India beyond recognition. In 1996, Confederation of Indian Industry (CII), a leading industry association, took the first initiative on corporate governance by developing a code for the Indian companies. This was followed by Securities and Exchange Board of India (SEBI) appointing a committee under the chairmanship of Kumaramangalam Birla in 1999 to study the corporate governance measures required. The primary objective of the committee was to view corporate governance from the perspective of the investors and shareholders and to prepare a Code to suit the Indian corporate environment. The committee had identified the Shareholders, the Board of Directors and the Management as the three key constituents of corporate governance and attempted to identify in respect of each of these constituents, their roles and responsibilities as also their rights in the context of good corporate governance. Based on the report of the committee, Clause 49 was introduced as part of the Listing Agreement for the companies listed on the Indian stock exchange. It specified the minimum number of independent directors required on the board of a company. The setting up of an Audit committee, and a Shareholders Grievance committee, among others, were made mandatory as were the Management s Discussion and Analysis (MD and A) section and the Report on Corporate Governance in the Annual Report, and disclosures of fees paid to non-executive directors. A limit was placed on the number of committees that a director could serve on. When India was progressing towards these reforms, the international financial scandals (Enron and WorldCom) shook the entire world community. These scandals led to a considerable debate on the need for a strong corporate governanc with countries around the world drawing up guidelines and codes of practice to strengthen governance (Sarbanes-Oxley legislation, 2002 and Cadbury, 1992). Financial scandals across the globe, globalization and a need to face increased competition resulted in renewed interest in the issue of corporate governance in India. Various reforms were aimed at strengthening the existing standards of corporate governance. Further, SEBI, through initiatives like amending Clause 49 of the Listing Agreement, brought about strict corporate governance norms for publicly listed companies. The present research closely studies the financial disclosures reforms brought about by Clause 49 and evaluates their impact on the level of financial disclosures of the Indian firms. The financial disclosures assume a significant place in the corporate governance mechanism since they act as a vehicle for the flow of information to stakeholders. The report begins with a quick summary of the corporate governance reforms that have taken place since 1991. It then discusses the Clause 49 in detail and its impact on the financial disclosure practices of the sample Indian firms by constructing a 10 Corporate Governance Transparency and Disclosure Score (CGS) based on the attributes drawn from the Standard and Poor s (S and P) Transparency and The corporate governance of a firm is influenced both by external as well as internal factors. External drivers such as listing status on international exchanges are considered to be an important determinant of the level of disclosures a company makes. Due to practical limitations, firms often adopt internal disciplining devices. Financial disclosures are one such internal mechanism which enables investors and other outside parties to monitor firm performance by reducing information asymmetries. According to Whittington (1993), the primary use of annual reports is to make quantitative and qualitative information available about the company to all the stakeholders, including existing and potential shareholders. This facilitates evaluation of management by various stakeholders. According to Baek et al. (2009), cost-effective and timely availability of information to its users is critical. Also accurate and reliable information enables investors to make better investment decisions. Disciplining measures like codes of conduct, whistle-blower policies, penalties for financial indiscipline, etc., rely on information presented in the financial statements. With the given concerns like ethics in business and the impact of different institutional environments and culture on corporate governance, emerging economies like India need to develop sound corporate governance models on an immediate basis. Corporate Governance has become a buzz word in the corporate sector. It has emerged as a means of corporate excellence and driving force for attaining greater performance, maximizing the wealth of the stakeholder and corporate value. Yet, there is a little evidence that good governance can prevent further corporate failure or contribute to improved organizational effectiveness (Moxey, 2004). Several committees and commissions have been appointed to review various issues and to make appropriate recommendations for better CG practices. The Asian financial crisis also demonstrated that even strong economies lacking transparent control, responsible corporate boards and shareholder rights can collapse .The underlying causes of the Asian crisis have been clearly identified. First, substantial foreign funds became available at relatively low interest rates, as investors in search of new opportunities shifted massive amounts of capital into Asia. As in all boom cycles, stock and real estate prices in Asia shot up initially, so the region attracted even more funds. However, domestic allocation of these borrowed foreign resources was inefficient because of weak banking systems, poor corporate governance, and a lack of transparency in the financial sector (Aghevli). Consequently, various countries in the world have adopted the CG reforms. Due to the frauds and financial deficiencies involved in the corporate sector in the US and the UK, the CG practices gained more attention. Scandals such as those in prominent organisations like Worldcom saw a complete breakdown of the system of corporate governance. The actual fraud within WorldCom consisted of a number of so called topside adjustments to accounting entries to prop up declining earnings. Mostly these consisted of improper drawdowns of reserves accumulated from its acquisition program and other sources and improper capitalization of costs which should have been expensed. The judge handling the SEC proceedings in New York reported that the company overstated its income by approximately $11 billion, overstated its balance sheet by approximately $75 billion and, as a result, caused losses in shareholder value of as much as $250 billion, a significant amount of the latter, of course, in employee 401(k) retirement funds . (Thornburgh, March 22, 2004 ). Such cases have disclosed the financial loopholes and prompted the debate of strengthening the disclosure norms in world s most advanced economies as well.