Module 3: Corporate Governance – Evidence of Corporate Governance from Arthsashthra

 In third century BC lived Kautiliya, one of the legendary characters in Indian history. His master work, the Arthashastra, ought to be read by all, be they statesman, business managers or academic scholars. Arthashastra when translated means “knowledge of wealth” or “wealth of knowledge

Kautilya’s Arthashastra is written in Samskrit, contains 15 books, 150 chapters with 6000 sutras (shlokas)and Covers over 180 topics. It is known as a Book  of Economics, State craft, Management, Warfare,  Strategy etc, and is considered as  a book of  ‘Total Management’

Vishugupta-Kautilya-Chanakya (370-283 BCE) was a teacher in Taksasila, an ancient centre of learning, and was responsible for the creation of Mauryan empire the first of its kind on the Indian subcontinent. He was born in 3rd century B.C. He is responsible for pulling down the Nada Dynasty ; He was the king maker during tenure of  Chandragupta Maurya ; Responsible for the retreat of Alexander the Great from India .Arthashastra and Neetishastra were documented towards the end of his life

Kautilya's Arthashastra maintains that for good governance, all administrators, including the king were considered servants of the people. Good governance and stability were completely linked.

”. According to Kautilya‘s Arthasastra, the Hindu way of life reveals four main aims (1) Dharma (2) Artha (3) Kama and (4) Moksha. Artha refers to material progress which is required in order to live a balanced life. Arthasastra‘s main part deals with National Security, Foreign Policy, Administration of Justice, Economic Development Policy, Taxation, Labor Management and Financial Management. Kautilya describes the rules to prevent the misuse the power.

The substitution of State with Corporation, the Council of Advisors of the King with the Board of Directors, the King with CEO and the subjects with the shareholders bring out similarity in CG structures.

 Central to the concept of CG is that public good should be ahead of private good and that the corporation’s resources cannot be used for personal benefit.

Kautilya’s philosophy is based on the principles of “sam, dam, dand, bhed” (persuasion, temptation, punishment, and division) as various different and sequential means to achieve an end.

Kautilya used the word ‘dharma’ (which in general, means ‘duty’) and righteousness in personal and social conduct. He described the basic ethical values as, “Duties common to all – ahimsa (abstaining from injury to all living creatures); Satya (truthfulness); cleanliness; freedom from malice; compassion and tolerance.

 

 

 

 

The seven dimensions of Corporate Governance identified are

•      Conduct of the King

•      Administering Justice

•      Judicial Fairness

•      Measures against Misappropriation of State Funds

•      Concept of Punishment

•      Identification and Prevention of Corrupt Practices

•      Strict Code of Conduct

The structure Arthasasthra has put forward for Corporate Governance has following systems, procedures with  roles specified.

•      SWAMI – THE KING (THE LEADER)

•      AMATYA – THE MINISTER (THE MANAGER)

•      JANAPADA – THE COUNTRY (YOUR MARKET)

•      DURG – THE FORTIFIED CITY (HEAD OFFICE)

•      KOSHA – THE TREASURY (FINANCE)

•      DANDA – THE ARMY (YOUR TEAM)

•      MITRA – THE ALLY (FRIEND/CONSULTANT)

 

To the specific roles of “Swami”- the King or leader  and “ Amatya “ - the Minister or Manager, Arthasasthra always wanted them to ask themselves three questions:

Why am I doing it ?

What the results might be ? and

Will I be successful?

Only when you think deeply & find satisfactory answers to these questions , should proceed with the performing the task.

“In the happiness of the subjects lies the benefit of the king and in what is beneficial to king and in what is beneficial to the subjects is his own benefit – (1.19.34)

 

Chanakya defines Janapada as your market and Durg , the fort, as your Head Office. In this respect his advice is “once you start working on something, don’t be afraid of failures, and don’t abandon it. People who work sincerely are the happiest”.

His mode of Corporate Governanceequivalent has four dimensions: ‘Raksha’, ‘Vridhi’, ‘Palana’ and ‘Yogaskhema’

‘Raksha’ literally mean Protection; This can be equated to Risk management aspects in today’s Corporate Governance

‘Vrudhi’ refers to Growth which is similar to Stakeholders Value enhancement

“Palana’ is about maintenance equated with Compliance in letter and spirit according to the modern Corporate governance environment

‘Yogaskhemam’ stands for social security, the counterpart of Corporate Social Responsibility

Kautilya said the ruler must aim to conquer other territories and ensure Yogakshemaand Lokasamgraha of his subjects. Yogakshema means to ensure welfare of the state and subjects implying happiness, prosperity, peace and bliss of his people so as to achieve Lokasamgraha which means to do what is beneficial to people. Kautilya regarded economic activity as the driving force behind the functioning of any political system. He stressed on a well-managed revenue system. Kautilya was a true statesman for whom, good governance was paramount. He suggested built-in checks and balances in systems and procedures for the containment of malpractices.

 

 

Good governance in Kautilya’s literature is aimed at fulfilling the welfare of the people. “In the happiness of the King’s subjects lies his happiness, in their welfare, his welfare.

The jargon related to Human Resource Management was not prevalent then, but its essence was widely practiced in Kautilya’s times. The King must look to the bodily comforts of his servants by providing such emoluments as can infuse in them the spirit of enthusiasm to work. He should not violate the course of righteousness and wealth. Thus, he shall not only maintain his servants, but also increase their subsistence and wages in consideration of their learning and work.

Kautilya said that good governance and stability go hand in hand. According to him, there is stability if rulers are responsive, accountable, removable, and recallable, otherwise there would be instability.

Kautilya’s Arthashastra identified the significance of training and learning. It clearly stated that training imparted discipline. Kautilya stated that investment in human capital especially in higher education would have a greater impact on the growth and development of the economy. In his own words, “education is the best friend. An educated person is respected everywhere . Education beats beauty and the youth.”

Provedand applied management of Chanakya during the Maurya Dynasty is historically evident as the best ever management practices India followed. Arthasastra and Chanakya Sutras are the two gospels of Indian management, enough to establish IMS the Indian management system for the modern corporate world of 21^st century.

Sarbanes Oxley Act 2002 has been passed in U.S to enhance corporate governance norms & prevent corporate frauds.

 

The provisions of the Companies act 2013, regarding  corporate governance  has to be comply by the listed  entities as follows:-

 

 The Board of Directors and composition of Board

(a) The board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and 50% of the board should be non-executive directors of the Company.

(b) where the chairman of the board is a non-executive, at least 1/3rd of the board should be independent director and in case he is an executive director, at least 50% of the board should be comprise of independent director.

Provided that where the non-executive chairman is the promoter of the company or related of the promoter or person occupying management position at the board level or one level below the board, at least half of the  board of the company should be independent directors.

Audit Committee, Its Composition and frequency of its meeting

Audit Committee shall be reviewed the annual financial statement, quarterly financial statement before submission to the board for approval, with management, its review the internal audit function, performance of the internal and statutory auditor e.t.c.

(a) the audit committee should have at least 3 independent director as member and two-third of the members of the audit committee should be independent Directors.

(b) all members of audit committee should be financially literate and at least one member shall have accounting or related financial management expertise.

(c) the audit committee should meet at least four times in a year and not more than 4 months elapse between two meetings. The quorum shall be either two members or 1/3rd of the members of the audit committee whichever is greater, but there should be a minimum of 2 independent members present. 

Nomination and Remuneration Committee - the committee shall constitute with minimum three directors and all directors of the committee should be non-executive director with at least 50% of the directors should be independent directors.

Stakeholder Relationship Committee - the listed entity shall be constitute the stakeholder committee for the redressal of grievances of the shareholders, debenture holders and other security holders.  

Risk Management Committee -  Every listed entities should be constitute a risk management committee which shall comprise of the members of the board as its members.

Vigil mechanism - The vigil machanism shall be established for directors and employees that they can easily report against any fraud or misconduct to the chairperson of the audit committee.

Related Party Transaction - All related party  transaction shall require prior approval of the audit committee. audit committee may grant the omnibus approval for related party transaction proposed to be entered into by listed company.

Subsidiary Companies - At least one independent director of the holding company should be a director of the board of the material non-listed Indian subsidiary company. 

Every listed entities are required to submit quarterly progress report within 15 days from the close of each quarter to respective administrative authority .