deepali pant joshi : nism conference on ethics and corporate governance speech by dr deepali pant joshi, executive director of the reserve bank of india, at the national institute of securities markets conference on ethics and corporate governance, kolkata, 11 december 2013. * * * introduction at the outset, let me congratulate the organisers for this topical choice of subject, one which concerns us all. i thank director, national institute of securities markets, dr sandip ghose and the institute of company secretaries for having me here and my dear friend, prashant saran, for that brilliant opening address, which quite sets the tone for this panel. que custodiet ipso custodes? who will guard the guards? over the last two decades, corporate governance has attracted a great deal of public interest, it is now widely appreciated that this is critical for the economic health of corporations and of larger society. the headlines of newspapers of the past few years in particular, portray a dismal story of lack of corporate ethics : satyam, enron, falling stock markets, corporate failures, dubious accounting practices, abuses of corporate power, criminal investigations reflect that the entire economic system on which investment returns depend is showing signs of infirmity and stress that have undermined investor confidence. almost as if checks and balances that should protect our interests are pushed to one side, driven by the overwhelming need to move fast in relentless pursuit of profits. notably some failures were the result of fraudulent accounting and other illegal practices, others were just bad governance. company boards or old boy ’ s clubs? company boards often deteriorate to being a cosy club, friends of the boss, who just met to rubber stamp his decisions. i read the economist ( of 7th december ) on flight, and the turn of phrase ( on page 67 ) was interesting. critics have compared directors to “ parsley on fish ”, decorative but ineffectual ; or honorary colonels, ornamental in parade but fairly useless in battle ”. ralph nader calls them “ cuckolds ” who are always the last to know when managers have erred. the corporate scandals of the early 2000s forced boards to take a more active role. the sarbanes - oxley act of 2002 and the new york stock exchange ’ s new rules in 2003 obliged directors to take more responsibility for preventing fraud and self - dealing. this led to a big increase in the quality of boards. but it also

wasted a lot of talent on form - filling and boxticking. many of the same companies exhibited actual corporate governance risks such as conflicts of interest, inexperienced directors, overly lucrative compensation, or unequal share voting rights. in the face of such scandals and malpractices, there has been a renewed emphasis on corporate governance. oecd definition of corporate governance “ corporate governance is the system by which business corporations are directed and controlled. the corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions in corporate affairs. by doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance ” bis central bankers ’ speeches thus corporate governance includes within its ambit, the relationship of a company to its shareholders and to society ; the promotion of fairness, transparency and accountability ; reference to mechanisms that are used to “ govern ” managers and to ensure that the actions taken by them are consistent with the interests of key stakeholder groups. the salient features span issues of transparency and accountability, the legal and regulatory environment, appropriate risk management measures, information flows, the responsibility of senior management and the board of directors. the banking regulation act section 10a of the banking regulation act lays down stipulations for the board of directors. they must have special knowledge of the following accountancy agriculture and rural economy banking cooperation economics finance law small scale industry or any other matter, the special knowledge of, and practical experience in which, in the opinion of the reserve bank, would be useful to the banking company. provided that out of the aforesaid number of directors, not less than two shall have special knowledge of, practical experience, with respect to agriculture and the rural economy, cooperation or small scale industry and shall not ( i ) have substantial interest in, or be connected with, whether as an employee, manager or managing agent, any company, not being a company registered under section 25 of the companies act, 1956 ( 1 to 1956 ), or any firm, which carries on any trade, commerce or industry and which, in either case, is not a small scale industrial concern, or ( ii ) be proprietors of any trading, commercial or industrial concern, not being a small scale industrial concern. voting rights will be distributed amongst the board of directors in a manner such that no more than three directors are