N R Narayana Murthy, chairman and chief mentor of Infosys Technologies [Get Quote], is considered to have set new benchmarks in corporate governance through the firm he founded. Last fortnight, he was chosen to head National Association of Software and Service Companies' sub-committee on corporate governance.

Excerpts from his conversation with Business Standard's Subir Roy.

What is your agenda for the Nasscom committee on corporate governance that you are chairing?

The agenda for Nasscom's corporate governance and best practices committee is to bring together the best corporate governance practices that are necessary for the software services and BPO companies to operate harmoniously in this environment.

We will make a set of recommendations which will hopefully lead to better governance in the companies, and enhance the trust of various stakeholders in their management. However, these are only recommendations, they are not mandatory.

Could you highlight from recent experience some of the inadequacies in corporate governance in the Indian system?

We have a reasonably good rules system. My committee on corporate governance came out with a set of recommendations based on the best practices in many parts of the world and India.

We talked about the whistle-blower policy, related-party transactions, need for independent directors to be truly independent, tenure of non-executive directors, CEO- and CFO-certification on the lines of Sarbanes-Oxley, oversight of subsidiaries.

We need to highlight the success of companies that follow good governance practices so that promoters understand the importance of such practices.

In other words, we have to make respect respectable. Today, money is respectable, power is respectable. Everybody is ranked by his or her money. Business Standard has produced a list of all the billionaires whose wealth has vanished, thanks to the stock market.

But we have not come across any instance of ranking corporate leaders based on their respect in society. If you want good corporate governance, then you have to create role models who command respect in the corporate world.

You mentioned rules. We have lots of rules but there are loopholes.

I would, as an independent director, be wary of promoters of a listed company who have interest in subsidiaries which are not owned 100 per cent by the listed corporation.

There is always a temptation to transfer resources from the listed company to the unlisted subsidiaries where the promoters have interests. This is, in fact, the most popular way of creating asymmetry of benefits between promoters and shareholders.

This is one of the important reasons of violation of corporate governance. Second is, creating asymmetry of benefits for owner-managers. That is, you get yourself a lot of options and then you know the company is not doing well, but you go and sell your shares.

There are two ways of creating asymmetry of benefits in favour of owner-managers. One is by the owner-managers accruing to themselves disproportionate benefits from the corporation directly.

Second is, owner-managers using related-party transactions to accrue unjustifiable benefits to themselves. Any related-party transaction which is material will have to be approved by the shareholders because there are minority shareholders and if a promoter, who is a minority shareholder, wants to create a transaction that will benefit him, then it has to be looked at by all shareholders.

How useful are independent directors in reality?

Independent directors are extremely useful. If you create an environment where you invite independent people with high respect, self-esteem and self-confidence to serve on your board as independent directors; if you create an environment where there is discussion, debate, arguments and disagreements, then independent directors will serve as excellent watchdogs.

The problem is not with the institution of independent directors, it is with the mindset of the all-powerful promoters in some companies. If the independent directors operate at the pleasure of the owner-managers and promoters, then that has no value.

The other area of uncertainty is whether the auditors are delivering?

I think auditors have delivered. Let's not take one Enron and one Satyam [Get Quote] and say auditors have not delivered. Let's remember, in India itself there are 6,000 listed companies, probably all over the world there may be a hundred thousand or more, and if out of such a large number you see a small number of such frauds, I would not paint all auditing firms with the same brush.

What has happened in Hyderabad is a rare example where the owner-managers browbeat the auditors.

Are there some practices being followed which should best not be followed?

I think the practice of auditors meeting independent directors independently without the executive management being present is a good one.

Because there they can bring out their issues, their problems, if there are any signals that they see. Second, having internal and external auditors look at the whole picture is another good thing.

Is there something in favour of switching auditors every year?

No, I don't think we should do that every year because you take a little bit of time to understand the processes, nuances; probably once in five or six years is fine.

Some are saying that real salvation lies in shareholder activism.

Yes, shareholders have to be activists, they have to demand information, fairness, transparency and accountability, they have to attend AGMs. Let us remember that a corporation is an example of shareholder democracy.

In a democracy, unless you have multiple points of view, unless there are open discussions and debates, unless there is an opposition which will review any proposal made by the management and, after an intelligent and fair discussion, approve it, you are likely to make big mistakes.

It is also being said that what really helps is whistle-blowers. So a society should respect them, promote the institution, give them protection, codify it. . . 

What you need to do, if the whistle-blowers were to contact the independent directors or the lead independent director and say, we sense some problem here, the independent directors should not let the identity of the whistle-blower be known to the executive management.

They have to then investigate, have to be provided with sufficient resources to address these issues. It is the responsibility of the executive management to ensure that there are enough resources with the independent directors to look into any allegation. I think the whistle-blower instrument is very important.

After Enron and Satyam, the perception has grown that if the promoter manager and a few others decide to do the wrong things then there's no way anybody is going to find out for quite some time.

Not really. If we don't implement the processes properly then you are right. If the auditors had independently verified the bank balances with the banks, then this would not have happened.

Similarly, if the independent directors had looked at the fact that there was a possibility of related-party transactions -- these are all normal alarm signals. The other problem is, independent directors cannot be in awe of the chairman-CEO.