Ijcbs Vol 2 No 4 April 2011 Issn 2156-7506

1

International Journal of Contemporary Business Studies Vol: 2, No: 4 .April, 2011 ISSN 2156-7506 Available online at http://www.akpinsight.webs.com

Copyright © 2011. Academy of Knowledge Process

International

journal of Contemporary Business Studies

ISSN 2156-7506

An International Journal Published by

Academy of Knowledge Process www.akpinsight.webs.com

Copyright © 2011 IJCBS

IN THIS ISSUE:

VOLUME 2 NUMBER 4 April 2011

The Governance of Credit Rating Agencies in the European Regulation: The Right Way to Enhance Market Competition? Dr.Francesca Gennari,Dr.Luisa Bosetti

A conceptual and critical review of Accounting Standards in Bangladesh Nikhil Chandra Shil

Corporate Governance Disclosure Practices In India: An Empirical Study Dr. Madan Bhasin

A study of relationship between Environmental Factors and Project Performance Ali Shirazi

2



International journal of Contemporary Business Studies

One of the largest Research Databases of world Indexed in Proquest

Indexed in CABELL-USA

-publish monthly (one volume per year) fast publication

-is open access to the full text

-has the editorial board & reviewers comprise of renowned scholars across the globe,

-has the quality policy includes indexing according to APA manual and its current status is international.

-is indexed & listed in:

Open Access Policy This journal provides immediate open access to its content on the principle that making research freely available to the public supports a greater global exchange of knowledge.

Copyright

To protect the copyright of the journal enable, IJCBS and the Publisher, authors must assign copyright in their manuscripts to IJCBS. Authors should make sure on submission that the article is original, is not under consideration for publication by another journal, has not previously been published elsewhere and that its content has not been anticipated by previous publication.

3



Saddal H.A Chief Editor

Editorial Board

Editorial Board consists of PhD doctors from all over the world

Prof. Dr. Nada k. Kakabadse Professor - Management & Business Research

University of Northampton Business School UK

Dr. M. A. Sharifian

PhD Industrial/Organizational Sociology University Jussieu, (Paris VII),

France

Dr. Salaheldin Ismail PhD. University of Glasgow, UK

Head of Department Marketing & Management College of Business & Economics

Qatar University

Prof. Dr. Luiz Moutinho Professor of Marketing University of Glasgow

Scotland

Dr. Ali Salaman Saleh PhD

University of Wollongong Australia

Prof. Dr. Viorel Cornescu

PhD Economics Vice Rector of "Nicolae Titulescu" University

Romania

Prof. Dr. Vasyl Gerasymchuk PhD Economics

National Technical University of Ukraine, Kyiv Politechnic Institute,

Ukraine

Assoc. Prof. Dr. Elena Druica PhD Microeconomics & Risk Economics Head of Department, Business & Administration University of Bucharest Romania Prof. Dr. Jorgen L. Pedersen PhD Ass. Prof. Dept. of Manufacturing Engineering & Management Technical University of Denmark Denmark Dr. Saeid Saeida PhD Business Administration Assistant Professor Dept. of Economics, Management & Accounting Yazd University Iran Dr. Azlan Amran PhD Assistant Professor School of Management, University Sains Malaysia Dr. Ah Pak Ass. Professor Department of Management Xi'an Jiaotong-Liverpool University China Dr. A. Pourezzat Assistant Professor School of Management, University of Tehran Iran

International journal of

A journal of Academy of Knowledge Process


4



Sasan Ghasemi CEO Ala Excellence Consulting Group

International Speaker

Prof. Dr. Moaddi M. Almeth-hib College of Business Administration

Department of Management King Saud University

Kingdom of Saudi Arabia

Dr. Mohammad Ali Feizpour PhD Industrial Economics

Assistant Professor Dept. of Economics, Management & Accounting

Yazd University Iran

Magdalena Radulescu

PhD. Lecturer Scientific Secretary

Faculty of Economics Study

Prof. Dr. Michela Cortini PhD, Ass. Prof. Department of Work and Organizational Psychology University of Bari Italy Prof. Dr. Sven Voelpel Professor of Business Administration Jacobs Center on Lifelong Learning and Institutional Development Jacobs University Germany Dr. Madan Bhasin Professor in Accounting College of Business, Hospitality and Tourism Studies, Fiji National University, P.O. Box 7222, Valelevu, Nasinu, Fiji Islands

University of Petesti Romania

5



Contents:


The Governance of Credit Rating Agencies in the European Regulation: The Right Way to Enhance Market Competition? Dr.Francesca Gennari,Dr.Luisa Bosetti. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

A conceptual and critical review of Accounting Standards in Bangladesh Nikhil Chandra Shil. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5

Corporate Governance Disclosure Practices In India: An Empirical Study Dr. Madan Bhasin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4

A study of relationship between Environmental Factors and Project Performance Ali Shirazi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 8

VOLUME 2, NUMBER 4 April 2011

6



The Governance of Credit Rating Agencies in the European Regulation:

The Right Way to Enhance Market Competition?

Dr.Francesca Gennari, (PhD)

Department of Business Administration, Faculty of Economics, University of Brescia

Contrada Santa Chiara, 50 – 25122 Brescia Italy

Dr.Luisa Bosetti, (PhD) (corresponding author)

Department of Business Administration, Faculty of Economics, University of Brescia

Contrada Santa Chiara, 50 – 25122 Brescia Italy

ABSTRACT

Since 2007 financial markets worldwide have been suffering from a confidence crisis which has emphasised the discussion about the Credit Rating Agencies (CRAs) and the opportunity to enhance the competition in such a highly concentrated sector. The reform process, carried out by European and American regulators, aims at reinforcing the external surveillance on CRAs and, at the same time, improving the governance of the agencies in terms of board composition, internal control systems and disclosure. After an in-depth and comparative analysis of the legal rules, the article shows and discusses the results of an investigation focalised on the contents and quality of the disclosure of 32 selected CRAs, with the purpose of foreseeing the future competitive conditions in the European rating market, since the new European Regulation should break the oligopoly of the largest American agencies by introducing minimal governance requirements. Key words: Credit rating agencies, regulation (EC) 1060/2009, competition, NRSROs, ECAIs, governance.

1. INTRODUCTION Credit rating agencies (CRAs) are specialised in evaluating the credit risk: they issue opinions on the creditworthiness of private and public issuers and the reliability of financial instruments. A rating is an opinion on the probability that a loan or another financial instrument will not be entirely and timely repaid and will fall into default (Amtenbrink & De Haan, 2009; European Commission, 2006). Since ratings steer the choices of many investors, a large debate has risen about the ratings’ quality, the independence of CRAs from rated issuers and the opportunity to enhance the competition in such a highly concentrated sector, where almost all of the ratings are issued by three CRAs (Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings).

7



This topic has attracted the attention of policy makers and scholars, who have stressed the potential conflicts of interests within the issuer-pay business model, the most adopted by CRAs, as well as the need for improvement in the CRAs’ governance, rating processes and transparency. The subprime crisis has brought CRAs under fire; as a matter of fact, it has accelerated the reform process that some countries were already carrying out. Indeed, CRAs have certainly played a role in the diffusion of the crisis, due to the investment grade ratings they have assigned to issuers (like Lehman Brothers, Fannie Mae, Freddie Mac and AIG) that very soon became insolvent. Moreover, the CRAs have often evaluated structured financial instruments in the creation of which they had taken part, arousing perplexity on their objectivity in the rating judgement. In their efforts to get over the crisis, European and American regulators have introduced and enhanced respectively the external surveillance on CRAs; besides, both of them have imposed rules on internal control, independence, management of conflict of interest and disclosure. In the light of the above-mentioned premises, this article has two purposes, based on different but integrated research phases. First of all, we summarise some weaknesses in rating sector stressed in the business economics literature (section 2), as a starting point to comparatively analyse the contents of the reforms as concerns external surveillance, control in corporate governance and internal control (section 3). After that, our research acquires an empirical nature: we show and discuss the results of an investigation aimed at verifying the contents and quality of the disclosure divulged by some selected CRAs, in order to identify both the deficiencies and the best practices internationally adopted (section 4) and to advance some considerations on the future evolution of competition in the rating sector (section 5).

2. LITERATURE REVIEW Up to now, the studies on CRAs have mainly adopted a financial point of view (Ashcraft & Schuermann, 2008; Coval, Jurek, & Stafford, 2009; Hull, 2009; Lim, 2008; Yay, 2010). Due to the economic crisis started in 2007 (Buiter, 2007; Crouchy, Jarrow, & Turnbull, 2008; Diamond & Rajan, 2009; Felton & Reinhart, 2008, 2009; Friedland, 2009; Kolb, 2010; Masera, 2009) some scholars have also underlined the most important weaknesses of the rating sector, linked to the CRAs’ organisational structure, their functioning, the relationships with the issuers of financial instruments, the questionable quality of ratings, the low competition and the deficiencies in surveillance by public authorities. Most of these problems can be ascribed to the lack of mandatory provisions specifically addressed to CRAs, which has characterised the international context until the second half of this decade. An extensively debated aspect concerns CRAs’ business models. In offering their service of credit worthiness evaluation, CRAs help issuers meet investors. Ratings are frequently based on information – even sensitive and confidential – that CRAs raise from the issuers, thanks to their cooperation (European Commission, 2006): CRAs rarely use only public information. Since ratings help reduce information asymmetry between the issuer and the investor (IOSCO, 2008; Listokin & Taibleson, 2010), they are usually sold by CRAs as economic services. Based on the part who requires and pays for the assessment service, we can distinguish between two main business models (Justensen, 2009; Mathis, McAndrews, & Rochet, 2009; Richardson & White, 2009). The issuer-pay model is the most utilised one. Its name stresses the issuer’s active role in the rating process: indeed, the issuer applies to one or more CRAs to be comprehensively evaluated as a borrower (“issuer rating”) or to obtain the assessment of a specific financial instrument he intends to offer to the market (“instrument rating”). As a compensation for the evaluation service, the issuer pays fees to the CRA (usually on an annual basis), and these payments originate the CRA’s revenues: there is consequently a clear conflict of interests for CRAs (Buiter, 2007).The ratings paid by an issuer are normally made public as a signal of the reliability of the issuer or the financial instrument. An investment grade rating (that means a good rating) reassures the investors about the probability to obtain interests and

8



the redemption of their money; from the issuer’s point of view, it helps collect money and pay low interest rates. Summarising, ratings contribute to the definition of credit terms. The virtuous working of the issuer-pay model should guarantee effective rating processes, thanks to the mentioned cooperation between the CRA and the issuer in phase of information collection and analysis. It is in the issuer’s interest to be transparent, supplying the CRA with all the information necessary for a satisfactory rating. Nevertheless, the issuer-pay model determines two dangerous risks: the risk that the CRA is too indulgent towards the issuer that pays for the rating, and the risk that the issuer hides or manipulates information to obtain a better rating. Unfortunately, these risks have come true in recent years, causing the issue of poor-quality and untruthful ratings, used by the financial players in a very undiscriminating and uncritical way. After the investors have discovered this situation, their mistrust in CRAs started to increase.It is difficult to oppose the effects produced by the large use of the issuer-pay model, because it characterises the three biggest CRAs dominating the sector worldwide. Only few small CRAs operate with a different business model, defined investor-pay or subscriber-pay model: in the investor-pay model, the investor requires and pays for the rating in order to found investments on a professional and objective opinion concerning the issuer’s creditworthiness. Anyway, the investor-pay model makes it impossible for the CRA to obtain confidential information on the issuer evaluated, since there is no direct relationship between these two parts. As a consequence, the ratings paid by the investor depend exclusively on public information. Another problem regards the validity of ratings in time. In fact a rating may become misleading for the market if the CRA that has issued it does not periodically monitor or lately updates it, staying in a state of “inertia” (Conti, 2010; Matthews, 2009). For example, the three largest CRAs have maintained investment grade ratings for companies like Lehman Brothers and AIG until few days before their collapses. Similarly, the CRAs have neglected to update and modify their rating methodologies, adopting the traditional ones for long to assess also the sophisticated structured financial instruments (Brancaccio & Fontana, 2011; Danielsson, 2008).Sometimes the CRAs have even utilised wrong economic forecasts (Bawden, 2008) and overestimated the international economic perspectives, transferring this excessive confidence into the ratings; then, they have maintained their ratings at an investment grade to prevent panic and to avoid worsening the delicate economic situation. A large part of criticism towards CRAs is also due to their involvement as consultants in structuring the sophisticated financial instruments they have afterwards positively assessed (Mariano, 2008; Portes, 2008). On the one hand, this kind of behaviour has favoured the “rating shopping” phenomenon (Portes, 2008; Spreta & Veldkamp, 2009), on the other hand it has deceived the market in relation to the reliability of financial instruments deriving from the securatisation of subprime loans. In point of fact, such instruments were so complex that investors could not easily understand and evaluate them on their own, so they relied on ratings issued by CRAs (Hull, 2009). Unfortunately, these ratings were usually the result of the cooperation between a CRA and the issuer, who had made use of rating analysts’ help to structure new instruments in the highest compliance with the CRA’s rating methodologies (Buiter, 2007; Fender & Mitchell, 2005; Financial Stability Forum, 2008; Financial Services Authority, 2009; Conti, 2010). In other terms, many issuers of structured products have looked for the best evaluation by means of a sort of preventive rating shopping at one or more CRAs, which used to operate as consultants during the phase of structuring; after that, the same CRAs had no interest in withdrawing their own original opinion, so they used to assign and maintain high ratings for such instruments. What is more, these CRAs were the only keepers of the information necessary to assess those structured products, due to their internal complexity. Being

9



the other CRAs operating in the sector much smaller, they were unable to issue unsolicited and therefore uncompensated ratings, which could have been more neutral. Low competition in the rating market has also concerned policy makers and academicians. Indeed, the rating sector is highly concentrated, given that Standard & Poor’s, Moody’s and Fitch detain together more than 90% of the market all over the world (SEC, 2009).This oligopolistic structure discourages the entry of new CRAs, which would have difficulty in achieving a sufficient market share to survive economically. The three largest CRAs’ reputation is a barrier to entry into a sector dominated by the issuer-pay model, where the issuers usually choose their raters. High concentration is also due to the difficulty for small CRAs to issue unsolicited ratings based only on public information. Effective competition lacking, the quality of ratings issued by the largest CRAs has undoubtedly decreased. Nevertheless, the entry of new CRAs into the sector is not a sure solution to all the problems: indeed, small CRAs could be conciliatory towards the issuers, at least at first, in order to rapidly reach a satisfactory position in the market (Conti, 2010; Katz, Salinas, & Stephanou, 2009). All the phenomena we have described derived, among other things, from the wide trust in market self-regulation, which should have guaranteed the automatic punishment of unfair behaviour. The mechanisms of self-regulation have failed in recent years, because of the grave lack of transparency on CRAs’ activity and governance. Among other things, this situation is attributable to the nature of unlisted companies that characterises even the largest CRAs, which have been free from mandatory rules on disclosure for long time: CRAs were not accountable to the markets, financial regulators, governments or global financial entities (Stone, 2008). In spite of the signals that a strong change was indispensable, regulators have delayed their intervention, relying on the respect for the IOSCO principles and code of conduct regarding CRAs’ activities.However, the economic meltdown has imposed substantial modifications, determining the issue of mandatory provisions finalised at: identifying specific authorities for the rating sector, charged with powers of surveillance and intervention towards the CRAs, and obliging the CRAs to establish control bodies and to activate internal procedures of corporate governance and control based on independence, prevention of conflicts of interests and transparency.

3. REGULATORY FRAMEWORKS ON RATING AND CRAS This section describes the most important laws and self-regulations that should be a turning point for the rating sector in this century, influencing CRAs’ formal recognition, corporate governance and functioning. First of all, we consider the IOSCO voluntary provisions, which are addressed to the CRAs all over the world; then, we analyse the legislations adopted by the EU and the USA. Our study intends to identify recommendations and rules concerning CRAs’ corporate governance, external and internal control and disclosure to surveillance authorities and markets, as a premise to the following empirical research.

a) The IOSCO principles and code of conduct IOSCO was the first international organisation to publish rules of conduct for CRAs. Such provisions are contained in the “IOSCO statement of principles regarding the activities of credit rating agencies” (September 2003) and the “Code of conduct fundamentals for credit rating agencies” (December 2004, revised in May 2008): these documents should improve the protection of investors that rely on rating, on the one hand, and correctness, efficiency and transparency in the financial markets where the CRAs operate, on the other hand. The IOSCO provisions are voluntary and flexible in their implementation. CRAs can adopt them independently of their own country of origin; nevertheless, if national laws and regulations exist, they prevail on the IOSCO provisions. Even if the IOSCO provisions are not mandatory, IOSCO recommends that CRAs include these measures in their individual codes of conduct. More exactly, each CRA should

10



publish its code of conduct on its website, explaining if and where the code deviates from the IOSCO model and how it permits all the same the achievement of IOSCO’s purposes (“comply or explain” principle). The IOSCO provisions concern two main aspects: the internal control and the stakeholder communication (Table 1). IOSCO does not provide any measures instead about corporate governance and supervision by external authorities.

Table 1: Summary of the IOSCO Principles and Code of Conduct Internal control External communication

• Prohibition of consulting services on financial instruments to be rated

• Management and disclosure of conflicts of interests • Analyst rotation • Analysts’ compensation independence from CRA revenues • Analyst independence from any other businesses of the CRA • Rigour of rating methodologies and models • Adequacy of human and financial resources to rating

activities • Reliability of information used in rating processes • Conservation and treatment of documents • Confidential information treatment • Periodic review of rating methodologies and models • Introduction of a review function; where feasible and

appropriate, it should be independent • Introduction of an independent compliance function

• List of ancillary services • Description of rating methodologies, hypotheses and models • Disclosure of modifications to rating methodologies,

hypotheses and models • Periodical communication of historical default rates of CRA

rating categories • List of the key clients originating at least 10% of the CRA

total revenue • Information on compensation policies • Description of actual and potential conflicts of interests

b) The EU legislation The UE legislation on CRAs consists of several directives, regulations and guidelines.Directive 2003/6/EC on insider dealing and market manipulation (market abuse) states that if an issuer decides to allow a CRA to access to inside information, the CRA would owe a duty of confidentiality. The correlated Directive 2003/125/EC explains that credit ratings do not constitute investment recommendations; nevertheless, this Directive stipulates that CRAs should consider adopting internal policies and procedures designed to ensure that credit ratings are fairly presented and that they are objective, independent and accurate. Moreover, it states that CRAs disclose any significant interests or conflicts of interests concerning the financial instruments or the issuers to which their credit ratings relate.The Capital Requirement Directive (CRD, comprising Directives 2006/48/EC and 2006/49/EC) introduces the definition of External Credit Assessment Institution (ECAI), consequently to Basel Accords. This is the first time that the European Commission is specifically interested in a particular type of CRAs, the activity of which makes it necessary to implement an external preventive surveillance finalised at the official recognition of the ECAI status. The need for mandatory rules valid for all the CRAs operating within the EU has stimulated the European Parliament and the Council to adopt Regulation (EC) No. 1060/2009, which is currently under review as for the articles concerning competent authorities in order to reconcile the Regulation with the reformed structure of the European financial control authorities (ESMA in particular). The Regulation is intended to modify a sector in which self-discipline prevails, also due to an express choice of the European Commission that recommended CRAs to adopt the IOSCO voluntary code of conduct (Communication 2006/C 59/02).Considering the specificity and importance of the ECAI discipline and Regulation (EC) No. 1060/2009, we describe their main contents paying attention to control procedures and external communication. The ECAI discipline The importance of ECAIs is due to Basel II Accords, in consequence of which ECAIs’ credit ratings can be used by banks as a basis for capital requirement calculations in the Standardised Approach and, with reference only to securitisation exposures, in the Internal Ratings-Based Approach.

11



For our purposes, it is convenient to summarise the requirements a CRA must possess to be recognised as an ECAI according to the following provisions:

Directives 2006/48/EC and 2006/49/EC, as amended by Directives 2009/27/ EC, 2009/83/ EC and 2009/111/ EC (in course of transposition into the national laws by the EU Member States);

the CEBS1 Guidelines of 2006, which are currently under review to guarantee their consistency with the mentioned directives2.

These rules arrange a system of external and internal controls on ECAIs and impose transparency; this is manifest from the recognition procedure, introduced in 2006 and recently modified in order to expedite the checks by the national competent authority, if the CRA has already been registered in accordance with Regulation (EC) No. 1060/2009. The procedure of ECAI recognition stresses the key role of national bank authorities as external supervisors on ECAIs. The national bank authorities have the power to require information and they operate with the support of CEBS, the EU body responsible for issuing guidelines (regulatory function). A CRA is recognised as an ECAI within the boundaries of the EU-country the bank authority of which has received, assessed and accepted the application. Applicants can be CRAs themselves, but also other institutions (usually banks) that intend to use an ECAI’s ratings for risk-weighting purposes. The application is presented to the national competent authority, which must verify the compliance of some elements with specific criteria (“direct recognition”): therefore the competent authority activates external preventive controls on eligible ECAIs’ structures and processes. Anyway, if the CRA has already obtained the ECAI status in another Member State, the competent authority is not obliged to carry out its own direct recognition process: it can confirm the ECAI status conferred by the authority of the other EU-country (indirect recognition), thanks to a provision oriented to encourage cost reduction and procedure simplification. In this sense, CEBS has recommended that the competent authorities of all the Member States adopt the suggested procedures in order to reach the greatest possible convergence in the approach and in the assessment within the EU. The application should be supported by comprehensive, transparent and appropriately documentation so that the competent authority can evaluate the adequacy of the CRA to be recognised as an ECAI. Information should include a general introduction of the CRA and all the details useful for the verification of the technical criteria set out in the CRD with reference to both rating methodology (objectivity, independence, on-going review, transparency and disclosure) and individual credit assessments (rating credibility and market acceptance, transparency and disclosure of individual credit assessments)3. Table 2 summarises the most important rules contained in the CEBS Guidelines of 2006 concerning the external supervision, the internal control and the disclosure of the ECAIs. No provision exists in relation to their corporate governance.

1 CEBS (Committee of European Banking Supervisors) has been replaced by EBA (European Banking

Authority) since 1 January 2011. 2 In March 2010 CEBS issued a consultation paper to collect suggestions and opinions about the draft revised

Guidelines on the recognition of ECAIs, based on the modifications imposed by Directives 2009/27/ EC, 2009/83/ EC and 2009/111/ EC.

3 Thanks to the amendments to the CRD, the technical criteria concerning the rating methodology are considered implicitly verified if the CRA has already been registered in compliance with Regulation (EC) No. 1060/2009.

12



Table 2: Summary of ECAI Provisions External supervision Internal control External communication

• Regulatory function: assigned to CEBS/EBA

• Inspection function: assigned to each national competent authority

• Power to require information: assigned to each national competent authority

• Management and disclosure of conflicts of interests

• Analysts’ compensation independence from ECAI’s revenues

• Analyst independence from any other businesses of the ECAI

• Rigour of rating methodologies and models

• Adequacy of human and financial resources to rating activities

• Introduction of a review function

• Confidential information to the competent authority as concerns the ECAI’s organisational structure, the revenue from the key clients and the financial statements of the past three years. The dissemination to the public of the mentioned information is subject to the prior consent of the ECAI.

• Description of rating methodologies, hypotheses and models

Regulation (EC) No. 1060/2009 The ECAI discipline does not exhaust the EU provisions on rating, because not all the CRAs apply for and obtain the status of ECAI. Moreover, each EU Member State could enforce the ECAI discipline in a different way from the others, due to the national validity of the ECAI recognition. The delicate situation of the financial markets during the world economic crisis has stressed the need for a significant reform of the rating sector, in order to restore reliable guarantees for the investors. Thus, the EU regulators have set a coordinated system of mandatory rules oriented to: charge selected authorities with tasks of preventive and on-going, direct or indirect supervision on CRAs; affect the CRAs’ bodies and activities of governance and control and the CRAs’ external communication, in the interest of the investors and the other stakeholders; enhance the international uniformity as regards the operational functioning of CRAs and the supervision on the part of the competent authorities. In order to fulfil these purposes, the European Parliament and the Council of the European Union have adopted Regulation (EC) No. 1060/2009, which intends: first, to ensure that CRAs avoid (or manage) conflicts of interest in the rating process; second, to improve the quality of the rating methodologies and the quality of ratings; third, to increase transparency by setting disclosure obligations for CRAs; fourth, to ensure an efficient registration and surveillance framework, avoiding “forum shopping” and regulatory arbitrage between EU jurisdictions4.The Regulation applies to credit ratings issued by CRAs registered in the Community and which are disclosed publicly or distributed by subscription. The Regulation sets a complex control system on CRAs, structured in three levels; each level includes various processes and it is more pervasive than the previous one for the CRA organisation.The first level regards the external control procedures: these are currently co-ordinated by CESR/ESMA5 and carried out by the competent authorities of the EU Member States, which deliberate on the CRA initial registration and on-going permanence in the rating sector within the EU borders. The second level concerns the control procedures implicit in corporate governance: these belong to the CRA’s board of directors or supervisory board6, particularly to the independent members, who shall be at least one third of the board, shall have sufficient expertise in financial services and structured instruments and shall receive a compensation not linked to the CRA business performance. The third level refers to the internal control procedures that aim at: avoiding conflicts of interest; verifying the quality of information used in the rating process; reviewing methodologies, models and key

4 Regards the context and the objectives of Regulation (EC) No. 1060/2009, please refer to the Explanatory Memorandum in the Proposal for the Regulation, document COM(2008) 704 final.

5 ESMA (European Securities and Markets Authority) has replaced CESR (Committee of European Securities Regulators) since 1 January 2011.

6 The competent board depends on the corporate governance model adopted by the CRA within the limits established in the national laws it is governed by.

13



rating assumptions (“review function”), adopting an independent approach; monitoring the compliance of the CRA and its staff with the obligations set by the Regulation (“compliance function”), by means of an independent department.The three levels of control are strictly interrelated and participate together in developing an effective and transparent corporate governance in CRAs, so that the investors’ expectations for CRA proper behaviour and management can be satisfied. In particular, the Regulation subordinates the CRA registration by the competent authority to the observance of operational requirements that the compliance officer, the analysts in charge of the review and the directors they refer to shall monitor. Moreover, the Regulation emphasises the importance of communication for maintaining effective relationships between the CRA and its external stakeholders. In this sense each CRA shall disseminate:

1. Information to prove its independence, disclosing the ancillary services to rating activities it has performed, the amount of revenue it derives from its key clients, its actual and potential conflicts of interest and its compensation policies;

2. Information on ratings and the rating process (description of methodologies, models and assumptions, as well as their modifications; historical default rates; etc.);

3. An annual “Transparency Report” with details on the CRA’s legal structure and ownership, corporate governance, allocation of staff, internal control mechanisms and revenue composition (distinguishing between fees from credit rating and non-credit rating activities).

Table 3 pays attention to the main contents of Regulation (EC) No. 1060/2009 in the fields of external supervision, control in corporate governance, internal control and external communication.

Table 3: Summary of Regulation (EC) No. 1060/2009

External supervision Control in corporate governance

Internal control External communication

• Regulatory function: assigned to CESR/ESMA

• Inspection function: assigned to each national competent authority

• Power to require information: assigned to each national competent authority

• Appointment of independent members in the CRA board of directors or supervisory board (at least one third, but no less than two)

• Independent members’ compensation not linked to the CRA’s business performance

• Independent members’ term of office: pre-agreed, not exceeding five years and not renewable.

• Sufficient expertise in financial services by the majority of the board of directors or supervisory board, including the independent members.

• In-depth knowledge and experience of structured finance by at least one independent member and one other member of the board.

• Prohibition of consulting services on financial instruments to be rated


• Analyst rotation • Analysts’ compensation

independence from CRA’s revenues

• Analyst independence from any other businesses of the CRA


• Adequacy of human and financial resources to rating activities

• Reliability of information used in rating processes

• Conservation and treatment of documents

• Confidential information treatment

• Periodic review of rating methodologies and models

• Introduction of an independent review function

• Introduction of an independent compliance function

• Minimum mandatory disclosure, contained in the annual “Transparency Report” published on the CRA website

• List of ancillary services • Description of rating

methodologies, hypotheses and models

• Disclosure of modifications to rating methodologies, hypotheses and models

• Six-month communication of historical default rates of CRA rating categories

• List of the key clients originating at least 5% of the CRA total revenue

• Information on compensation policies

• Description of actual and potential conflicts of interests

• Description of internal control for the prevention and management of conflicts of interests.

14



c) The US provisions The Credit Rating Agency Reform Act (CRARA) of 29 September 2006 was the first important legislation for the rating sector in the United States. The Congress published the CRARA in reply to the corporate scandals that had originated perplexities on the CRAs’ activity at the beginning of the millennium. In this respect the CRARA pursued a better quality of the rating processes in order to protect the investors and the public interest by enhancing accountability, transparency and competition in the sector. Until that moment CRAs were used to operate with an actual autonomy, because their activity was usually considered as a form of the freedom of the press established by the First Amendment of the US Constitution. Nevertheless, in 1975 the Securities and Exchange Commission (SEC) began to exercise its supervision on CRAs, a rather formal than substantial control consisting in managing the procedure for the recognition of CRAs as Nationally Recognized Statistical Rating Organizations (NRSROs) by means of “no-action letters”. The reform of 2006 was an attempt to reduce the weaknesses of the rating sector, which were among the others:

The formal role of the SEC; The circularity of the recognition process based on the no-action letters, which privileged the

largest CRAs with good reputation in the investment community (Coskun, 2008) and made it more and more difficult for the other CRAs to obtain the NRSRO status;

The lack of mandatory rules concerning the CRAs’ duties of transparency towards the SEC and the investors.

The CRARA has strengthened the role of the SEC in the NRSRO recognition process, also stressing its regulatory function and its powers to require information and to investigate. In particular, CRAs applying for the NRSRO status must fill in the “Form NRSRO”, giving information to the SEC on their legal status, organisation and affiliates, credit rating process and free dissemination, conflicts of interests, code of ethics, credit analysts, analyst supervisors and the compliance officer, their total and median annual compensation, and the largest users of credit rating services by the amount of net revenue earned from them by the CRA. If the SEC recognises the CRA as a NRSRO, it shall require the public dissemination of all non-confidential information contained in the Form NRSRO, for example by means of the CRA website. After the recognition, the NRSRO shall complete the same Form for the SEC and the investors as an annual certification at the end of each year. In July 2010 a section of Dodd-Frank Wall Street Reform and Consumer Protection Act introduced important amendments to the CRARA, including the establishment of a new external supervisor on the NRSROs (the Office of Credit Ratings, within the SEC) and the request for independent directors in the NRSROs’ boards. The independent directors are charged with tasks of control in corporate governance; they shall be at least one half of the board (and not fewer than two) and their remuneration shall not be linked to the business performance of the CRA. A portion of the independent directors shall include users of ratings issued by a NRSRO. Each NRSRO shall also have an internal control system focalised on the rating policies, procedures and methodologies. The NRSRO shall write out an annual report on its internal control system clarifying the responsibilities of management in introducing, maintaining and assessing the internal control structure; moreover, the CEO shall make an annual attestation to the effectiveness of the NRSRO’s internal controls. The US law obliges the NRSROs to implement preventive controls (oriented to avoid the misuse of non-public information and to manage any conflicts of interest), to periodically review rating methodologies

15



and models, and to monitor compliance with policies, procedures and rules. As concerns compliance control, the law also requires each NRSRO to establish an independent function. Table 4 combines the most important provisions on NRSROs from the CRARA of 2006 and the Dodd-Frank Act of 2010 with reference to external oversight, control in corporate governance, internal control and external disclosure.

Table 4: Summary of the CRARA and the Dodd-Frank Act External supervision Control in corporate

governance Internal control External communication

• Regulatory function: assigned to SEC

• Inspection function: assigned to SEC

• Power to require information: assigned to SEC

• Appointment of independent members in the NRSRO board of directors (at least one half, but no less than two)

• Appointment of users of credit ratings issued by a NRSRO as independent directors

• Independent members’ compensation not linked to the business performance of the NRSRO

• Independent members’ term of office: pre-agreed, not exceeding five years and not renewable

• Disclosure of consulting services on financial instruments to be rated


• Analyst rotation • Analyst independence from

any other businesses of the NRSRO


• Reliability of information used in rating processes

• Confidential information treatment

• Periodic review of rating methodologies and models

• Introduction of an independent compliance officer, whose compensation shall be independent of the NRSRO’s business performance

• Minimum mandatory disclosure, contained in the annual “Form NRSRO” published on the NRSRO website

• Annual report on the internal control system and its effectiveness

• Description of rating methodologies, hypotheses and models

• List of the 20 largest clients selected on the basis of the revenue for the NRSRO

• Information on compensation policies

• Description of actual and potential conflicts of interests

• Description of internal control for the prevention and management of conflicts of interests.

4. THE GOVERNANCE OF A SIGNIFICANT CLUSTER OF CRAS: METHODOLOGY & RESULTS The purpose of this survey is to express an opinion about the current level of compliance of a significant cluster of CRAs with Regulation (EC) No. 1060/2009, as regards their control systems and voluntary/mandatory disclosure. In fact, today the European Regulation contains the best practices for the financial market protection, since it generally provides stricter requirements than the other regulations in force. The new Regulation will offer a great opportunity to some CRAs to enter in the European rating market without excessive costs of adaptation. Vice versa, for some agencies the Regulation requirements should be an entry barrier because of compliance efforts. Consistently with the theoretical considerations we expressed in the first part of the paper, this survey aims at identifying which types of CRAs are the most inclined to European registration in relation to the current compliance of their governance with the Regulation requirements. The results will pave the way towards an assessment of the future evolution of competition in the rating sector, since the European Regulation should break the oligopoly of the largest American agencies by introducing minimal governance requirements and enhancing rating comparability.

The survey is organised in three stages: 1. The selection of a significant cluster of CRAs; 2. The specification of the items to be examined in the light of Regulation (EC) No. 1060/2009, and

the relevant data collection;

16



3. Results and discussion. CRA selection At present a complete and reliable schedule of CRAs acting at European and international level does not exist, except for the SEC’s list of NRSROs. Regulation (EC) No. 1060/2009, imposing a CRAs central register, will contribute to the improvement of transparency in this sphere. Therefore, this survey uses a cluster of CRAs already investigated in two previous studies, published in 2009 by IOSCO’s Technical Committee (A Review of Implementation of the IOSCO Code of Conduct Fundamentals for CRAs) and by CESR (Report by CESR on Compliance of EU based Credit Rating Agencies with the IOSCO Code of Conduct) about the compliance with the IOSCO Code. In the opinion of IOSCO’s Technical Committee and CESR, the agencies selected in their studies were potentially the most qualified for the registration in accordance with the European Regulation, which was still in progress at the time of the researches. In our survey, we examine 32 agencies, 18 of which have their seat in a European Member State.To correctly analyse the governance of a CRA, it is necessary to consider the economic and juridical characteristics of its own country as regards:

The prevailing legal system (common law or civil law); The development of stock markets and the relevant type of corporate control (market-oriented

systems or insider systems); The rules concerning the appointment of corporate governance boards and their administrative and

supervisory functions (one-tier models, two-tier models, two-part models). These factors can be ties or opportunities that, combined with the agencies’ autonomy as regards their ownership, governance and disclosure choices, cause a variety of situations that can be classified only in theory. For this reason, the national peculiarities of governance should not be neglected, even if the harmonisation of rules is a desirable step towards uniformity in rating quality. Table 5 stresses some significant differences among the 32 CRAs here analysed, with reference to their ownership, country legal system and stock market development, which determine the specific administrative and supervisory system of each CRA.

17



Table 5: List of agencies Agency NRSRO

ECAI Seat Corporate governance

system in force in the country (*)

Group belonging Market where the parent company is

listed AM Best Company NRSRO USA One-tier Parent company

Austin Ratings Brazil Two-part Austin Holding

DBRS NRSRO ECAI Canada One-tier

Egan Jones NRSRO USA One-tier Fedafin Switzerland One-tier

Fitch Rating NRSRO ECAI USA One-tier Fitch Group -

Fimalac Euronext Paris

JCR NRSRO ECAI Japan One-tier

Two-part

LACE Financial NRSRO USA One-tier LF Rating Brazil Two-part

Moody’s Investors Service NRSRO ECAI USA One-tier Moody’s

Corporation NYSE

Rating and Investment Information NRSRO ECAI Japan One-tier

Two-part

Realpoint NRSRO USA One-tier Morningstar SR Ratings Brazil Two-part Standard & Poor’s Financial Services

NRSRO ECAI USA One-tier Mc Graw Hill NYSE

AAA Soliditet Sweden One-tier Bisnode Business

Information Group

Assekurata Assekuranz Rating Agentur ECAI Germany Two-tier

National Credit Rating Agency Bulgaria One-tier Two-tier

Capital Intelligence Cyprus One-tier

Capp&Capp ECAI Italy One-tier Two-tier Two-part

Capp & Capp Value

Coface ECAI France One-tier Two-tier Natixis Euronext Paris

Companhia Portuguesa de Rating Portugal One-tier Two-tier Two-part

ECRAI Slovakia Two-tier

Euler Hermes Rating Germany Two-tier Allianz Euronext Paris

European Rating Agency Slovakia Two-tier

European Rating Agency

Lince ECAI Italy One-tier Two-tier Two-part

Cerved Group

MAR Rating Germany Two-tier PSR Rating Germany Two-tier

RS Rating Services Germany Two-tier Financial Services

Svensk Kommun Rating Sweden One-tier

The Economist Intelligence Unit Great Britain One-tier The Economist

Group

UC Sweden One-tier Parent company URA Rating Agentur ECAI Germany Two-tier (*) In the two-part system the Annual General Meeting (AGM) appoints both the Board of Directors and the Board of Auditors. In the two-tier system the AGM appoints the Supervisory Board, which in turn appoints a separate Management Board. In the one-tier system the AGM appoints the Board of Directors, which appoints the Management Control Committee from among its members.

18



It is important to underline that some of the agencies we investigate in this research are recognised as NRSROs and/or ECAIs. The contemporary presence of both the status for many extra-EU agencies draws attention to their global activity7; vice versa, European agencies are characterised by a more local activity. The 32 agencies have been further subdivided in clusters on the basis of the regulation governing their activity and leaving their geographical location out of consideration (Table 6):

10 agencies are NRSROs (also considering in this cluster the agencies doubly recognised as NRSRO and ECAI. Indeed, NRSRO recognition requirements are more restrictive than ECAI recognition ones);

5 agencies are ECAIs (excluding the agencies recognised as NRSROs and ECAIs at the same time);

17 agencies currently have no recognition. Finally, each cluster have been further subdivided in relation to the adoption of a code of ethics inspired by IOSCO Code of conduct. In our opinion this classification can be useful to a qualitative evaluation about the agencies’ level of compliance with the European Regulation. Table 6 shows the classification of the agencies used for the survey.

Table 6: Classification of agencies

With Code Without Code Total NRSROs 10 - 10 ECAIs 5 - 5 Others 11 6 17 Total 26 6 32

Data collection In the next step of the survey we identified the items to be verified. Since Regulation (EC) No. 1060/2009 requires what we can currently consider the international best practice about credit rating and CRAs’ governance, we selected its articles on control in corporate governance, internal control and disclosure, in accordance with the model proposed in the first part of the paper: these articles express the items for our empirical verification. We listed all the items in specific Excel worksheets, where we recorded all the results for each CRA. The results are summarised in this article by means of tables where data are processed. For data collection, we made use of codes of conduct, policies and all other information and documents about the agencies’ governance available on the CRAs’ web sites from September to November 2010. We are conscious that voluntary disclosure could not fairly represent the governance of an agency: the absence of non-compulsory information does not necessarily involve the inexistence of the fact. Nevertheless, the present trend of rules suggests a progressive international harmonization in regard to external and internal control. In future, transparency in communication could be a key factor in establishing competitive advantage. In the light of the general observance of common requirements (aimed at guaranteeing independent, comparable and high-quality ratings), the excellence in the rating sector will depend on the ability of each CRA to appreciate the relationships with its stakeholders through a constant and transparent communication. Data analysis and results In this section we describe the findings concerning control in corporate governance (Table 7), internal control (Table 8) and disclosure (Table 9).

7 Moody’s, S&P and Fitch are recognised as ECAI in Bulgaria, Italy, France, Cyprus, Slovakia, Sweden and

Great Britain; DBRS in France and Sweden; JCR and R&I in France.

19



Table 7: Corporate governance control (independent members) NRSROs ECAIs Others with Code Others without Code

No. % No. % No. % No. % Presence in administrative/supervisory organ

- - - - - - - -

Remuneration policy - - - - - - - - Term of office - - - - - - - - Sufficient expertise in financial services - - - - - - - -

Table 7 emphasises an absolute absence of information about independent board members. This situation could signify a lack of interest towards this subject, probably due to the absence of a previous regulation and specific obligations for CRAs.

Table 8: Internal control system NRSROs ECAIs Others with Code Others without Code

No. % No. % No. % No. % Prohibition of consulting services on financial instruments to be rated

7 70.0 3 60.0 10 90.9 - -

Conflict of interests 10 100.0 5 100.0 9 81.8 - - Analysts rotation 5 50.0 2 40.0 3 27.3 - - Analysts’ compensation independence from agency’s revenues

10 100.0 5 100.0 9 81.8 - -

Analyst independence from any other agency activities

10 100.0 5 100.0 11 100.0 1 16.7

Scrupulousness of methodologies and models 10 100.0 5 100.0 10 90.9 1 16.7

Adequacy of human and financial resources to rating activities

7 70.0 5 100.0 6 54.5 - -

Reliability of information used for assessment 10 100.0 5 100.0 10 90.9 1 16.7

Records of methodologies and dialogues with rated entity

10 100.0 5 100.0 10 90.9 - -

Confidential information treatment 10 100.0 5 100.0 9 81.8 - -

Periodic review of methodologies and models 10 100.0 5 100.0 7 63.6 1 16.7

Review function 8 (°) 80.0 1 20.0 5 (°°) 45.5 - - Compliance function 10 (§) 100.0 5 (^) 100.0 8 (^^) 72.7 - - (°) When specified, the review function is assigned to senior managers of great experience (in 4 agencies) or to a credit policy committee composed of analysts (in 2 agencies). Out of 8 agencies with a compliance function, 1 also declares the independence of it, while 5 think it is useful only in particular hypotheses (depending on the rated financial instrument). (§) The 80% of the NRSROs clearly specify the independence of the compliance officer too. (^) The compliance function is defined independent in 4 cases. (°°) No agency of this cluster with a specific review function states its independence. (^^) The function is independent just in 4 cases. Table 8 points out a greater transparency about internal control, in relation to the prevention of conflicts of interest, as well as the review of rating methodologies and models and the compliance control.The NRSROs express an high, or total, degree of compliance to the greatest part of the European Regulation’s items. Anyway, internal control effectiveness shall be further strengthened by the prohibition of consultancy and advisory services to rated entities and by the imposition of analyst rotation. Moreover, while all the NRSROs have established a compliance function, the review function has not been activated by the entire cluster and, where it exists, it is not always clearly identifiable and independent.

20



The ECAIs are similar to the NRSROs as regards the limits to consultancy and advisory services and reinforcement of analysts independence through rotation mechanisms. Although all the ECAIs affirm that they periodically review their methodologies, models and rating hypotheses, a specific review function is not activated, while the compliance function is always present. Compared to the NRSROs and the ECAIs, the non-recognised CRAs with a Code of conduct inspired by IOSCO Code are less compliant with the European Regulation requirements. Almost all these agencies state that they do not carry out consultancy activities and guarantee both the independence of their analysts and the quality of ratings (through scrupulous methodologies and use of reliable information). Nevertheless they should enhance the management of conflicts of interest, the review activity (through the establishment of a suitable function) and the compliance function. Finally, the non-recognised CRAs without any code of conduct are far from the European Regulation and need an in-depth review of their whole internal control system.

Table 9: Disclosure

NRSROs ECAIs) Others with Code Others without Code No. % No. % No. % No. %

Transparency Report - - - - - - - List of ancillary services 8 80.0 2 40.0 3 27.3 - - Description of rating methodologies, models and hypotheses

10 100.0 5 100.0 10 90.0 3 50.0

Disclosure about changes in rating methodologies, models and hypotheses

10 100.0 4 80.0 7 63.6 - -

Six-month data on historical default rates - - - - - (*) - - -

List of clients from which the agency obtains more than 5% of its total revenue

- - 1 20.0 2 (**) 18.2 - -

General nature of compensation arrangements

9 90.0 5 100.0 8 72.7 - -

Disclosure about potential and actual conflicts of interest

10 100.0 4 80.0 7 63.6 - -

Disclosure about internal control processes to prevent and manage conflicts of interest

10 100.0 5 100.0 9 81.8 - -

(*) 45.5% of agencies inform about rating default rate with one year recurrence. (**) 22.3% of agencies inform when a client originates more than 10% of whole agency’s revenue. Table 9 points out a high degree of compliance with the Regulation as regards the NRSROs, even when the results are zeroes, because they depend on a literal interpretation of the items. In actual fact, 70% of NRSROs publish historical default rates with a different time interval and commit themselves to signalling when at least 10% of revenue rises from one client. Table 10 shows the contents of the Transparency report, as required by the European Regulation.

21



Table 10: Transparency report: contents NRSROs ECAIs Others with Code Others without Code

No. % No. % No. % No. % Legal structure and ownership 10 100.0 1 20.0 2 18.2 1 16.7

Internal control system 2 20.0 2 40.0 1 9.1 - - Statistics on allocation of the staff - - 1 20.0 - - - -

Record-keeping policy 6 60.0 - - - - - - Outcome of the annual review of compliance function

1 10.0 - - - - - -

Management and rating analyst rotation 3 30.0 - - - - - -

Agency revenue 1 10.0 1 20.0 1 9.1 - - Governance statement 1 10.0 1 20.0 1 9.1 - -

The Transparency report will also increase the NRSROs’ disclosure, nowadays completely compliant with the European Regulation as regards only the information already demanded by NRSRO Form (legal structure and ownership). ECAIs’ external communication is similar to NRSROs’ one, except for the list of ancillary businesses. Moreover, the European Regulation sets a shorter time interval for the analysis of historical default rates, as we have already mentioned above: at the moment 60% of ECAIs give information with different recurrence. As concerns the communication about the main clients of the agency, please refer to Table 9. Furthermore, the ECAIs show a little degree of compliance with the request for mandatory disclosure of the Transparency report (Table 10). Non-recognised agencies with a code of conduct disclose information about methodologies, models and rating hypotheses, independence of analysts’ compensation from agency’s revenue, and conflicts of interest and their prevention. Nevertheless the percentages are widely improvable (Table 9). On the whole, the comparison with the information requested in the Transparency report underlines the need for significant compliance efforts in future (Table 10). Non-recognised agencies without a code of conduct are almost always reticent and opaque in their external communication (Tables 9 and 10).To conclude we can affirm that NRSROs seem to be ready to respect the European requirements as regards control in corporate governance (which is not currently carried out, but compulsory for NRSRO recognition in the light of 2010 Investor Protection and Securities Reform Act), internal control (perfectible in some aspects but amply consonant at present) and external communication (making currently confidential information public). The registration at CESR/ESMA will imply strong compliance efforts for existing ECAIs in relation to control in corporate governance. Although the ECAI regulation is less pressing than the American and the European Community ones, the agencies have a good level of compliance to Regulation (EC) No. 1060/2009 with regard to internal control and disclosure.The present affinity between NRSROs and ECAIs could be justified by the IOSCO self-regulation: indeed many of the IOSCO Code recommendations have been acquired by the European Regulation as mandatory rules. The importance of self-regulation also appears in the comparison between non-recognised CRAs with a code a conduct (whose registration is not precluded) and those without the document and so lacking in internal control (whose registration would probably involve unsustainable compliance costs). Therefore, we can deduce that the agencies currently recognised as NRSROs or ECAIs will be able to respect the European Regulation requirements without excessive compliance costs, unlike the others. Although the European Regulation aims at increasing competition in the European rating market, the biggest American agencies and the locally recognised ones will probably continue to dominate.Because of standardisation of minimal requirements in terms of governance

22



and disclosure, we expect that the CRAs will look for different factors for establishing competitive advantage, for example the use of better rating methodologies or the improvement of stakeholder relationship management through a more transparent communication. 5. CONCLUSION The analysis of reforms in rating sector points out a progressive harmonisation between the European and the American supervision models: this convergence probably accelerated because of the economic crisis, which has stressed the risks of a self-regulation system applied to CRAs. International harmonisation of rules is based on shared attention to external, internal and corporate governance controls and to the disclosure to the stakeholders, with the aim of strengthening agencies’ credibility assuring their independence, effectiveness of governance and transparency in both behaviour and communication. Indeed, credibility is the most important key factor in competitive advantage; nonetheless, this principle should be reconsidered with reference to a rating market dominated by few big players, which are irreplaceable, in case of failure, by equally trustworthy competitors8. Regulation (EC) No. 1060/2009, imposing requirements aimed at guaranteeing minimal qualitative standards, wishes the maintenance of financial markets stability and, at the same time, the increase of competition in rating sector. This consideration led us in our empirical analysis concerning a cluster composed of the potentially most qualified CRAs for the Community registration, with the purpose of assessing their current compliance with the European requirements and express an opinion about the future competition trend in the European rating sector. The analysis points out differences between agencies actually recognised as NRSRO/ECAI and all the others; in fact, the former have a good level of compliance with the European Regulation, while the latter have to fill the gap in their control systems. Moreover, the self-regulation appears to be carried out more effectively by the agencies already registered (in the United States and Europe), and it seems to be important for the promotion of their independence, but inadequate as regards the stakeholder protection. These reflections induce us to foresee that the future competitive conditions in the European rating market will not be very different from the current ones, with a clear predominance of the existing NRSROs. Nevertheless we commit ourselves to validate this opinion in the near future, when the list of agencies recognised in compliance with the new European Regulation is made public. Furthermore, we could develop our research by examining the actual effectiveness of the Regulation through an in-depth study of the management of registered agencies and the rating market dynamics.

6. REFERENCES

Amtenbrink, F. & De Haan, J. (2009). Regulating credit ratings in the European Union: A critical first assessment of Regulation 1060/2009 on credit rating agencies. Common Market Law Review, 46(6), 1915-1949.

Ashcraft, A. B. & Schuermann, T. (2008, March). Understanding the securitization of subprime mortgage credit. Federal Reserve Bank of New York Staff Reports, no. 318.

Bawden, T (2008, October 23). Credit rating agencies admit ranking many mortgage-related securities too high. The Times.

8 For example, we remind you about some clamorous failures by Moody’s, the biggest CRA in the world: on 20th

November 2001 Moody’s rated Enron B2 and on 2nd December 2001 Enron went bankrupt; on 15th September 2008, few hours before the bankruptcy, Lehman Brothers Holding was rated B3; on 15th September 2008 AIG was rated A2 and the day after it was rescued from bankruptcy by the US Government.

23



Brancaccio, E. & Fontana, G. (2011). The Conventional Views of the Global Crisis: A Critical Assessment. In Arestis, P., Sobreira R., & Oreiro, J.L. (Eds.), An assessment of the global impact of the financial crisis. Basingstoke, UK: Palgrave Macmillan.

Buiter, W.H. (2007, December). Lessons from the 2007 financial crisis, CEPR Policy Insight No. 18. London, UK: Centre for Economic Policy Research.

Committee of European Securities Regulators (CESR) (2009, May). Report by CESR on Compliance of EU based Credit Rating Agencies with the IOSCO Code of Conduct.

Conti V. (2010, September), Speech of CONSOB Chairman to the Italian House of Representatives, 4th permanent commission (Finance). Rome, Italy. Available in Italian at <http://www.consob.it/main/documenti/Pubblicazioni/Audizioni/intervento_conti_20100923.htm.>

Coskun, D. (2008). Credit rating agencies in a post-Enron world: Congress revisits the NRSRO concept. Journal of Banking Regulation, 9(4), 264-283.

Coval, J., Jurek, J., & Stafford, E. (2009). The Economics of Structured Finance. Journal of Economic Perspectives, 23(1), 3-25.

Crouchy, M.G., Jarrow, R.A., & Turnbull, S.M. (2008). The subprime crisis of 2007. Journal of Derivates, 16(1), 81-110.

Danielsson, J. (2008). Blame the models. In Felton, A. & Reinhart, C.M. (Eds.), The first global financial crisis of the 21st century (pp. 13-15). Centre for Economic Policy Research, VoxEU.org Publication.

Diamond, D.W. & Rajan, R.G. (2009). The credit crisis: Conjectures about causes and remedies. American Economic Review, 99(2), 606-610.

European Commission (2006). Communication from the Commission on Credit Rating Agencies (2006/C 59/02).

Felton, A. & Reinhart, C.M. (Eds.) (2008). The first global financial crisis of the 21st century, Centre for Economic Policy Research, VoxEU.org Publication.

Felton, A. & Reinhart, C.M. (Eds.) (2009). The first global financial crisis of the 21st century. Part II June-December 2008. Centre for Economic Policy Research, VoxEU.org Publication.

Fender, I. & Mitchell, J. (2005, June). Structured finance: complexity, risk and the use of ratings. BIS Quarterly Review, 67-79.

Financial Services Authority (FSA) (2009, March), The Turner Review: A Regulatory Response to the Global Banking Crisis.

Financial Stability Forum (2008, April). Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience.

Friedland, J. (2009). The subprime and financial crises. International Journal of Disclosure and Governance, 6(1), 40-57.

Hull, J.C. (2009). The credit crunch of 2007: What went wrong? Why? What lessons can be learned? The Journal of Credit Risk, 5(2), 3-18.

International Organization of Securities Commissions (IOSCO) (2003, September). IOSCO Statement of Principles regarding the Activities of Credit Rating Agencies.

International Organization of Securities Commissions (IOSCO) (2004, December, revised in 2008, May). Code of Conduct Fundamentals for Credit Rating Agencies.

International Organization of Securities Commissions (IOSCO) (2009, March). A Review of Implementation of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies.

Justensen, P.J. (2009). Ratings recall: Will new reform proposals make lasting impact? The Journal of Corporation Law, 35(1), 193-213.

Katz, J., Salinas, E., & Stephanou, C. (2009, October). Credit rating agencies. No easy regulatory solutions. Crisis Response. Note Number 8, 1-8.

Kolb, R.W. (Ed.) (2010). Lessons from the financial crisis. Hoboken, NJ: John Wiley & Sons.

24



Lim, M.M.-H. (2008). Old wine in a new bottle: Subprime mortgage crisis – Causes and consequences, The Levy Economics Institute Working Paper No. 532.

Listokin, Y. & Taibleson, B. (2010). If you misrate, then you lose: Improving credit rating accuracy through incentive compensation. Yale Journal on Regulation, 27(1), 91-113.

Mariano B. (2009). Do reputational concerns lead to reliable ratings?. In Felton, A. & Reinhart, C.M. (Eds.), The first global financial crisis of the 21st century. Part II June-December 2008 (pp. 135-136). Centre for Economic Policy Research, VoxEU.org Publication.

Masera, R. (2009). The great financial crisis. Roma: Bancaria Editrice. Mathis J., McAndrews J., & Rochet J.-C. (2009). Rating the raters: Are reputation concerns

powerful enough to discipline rating agencies? Journal of Monetary Economics, 56(5), 657-674.

Matthews, D.J. (2009). Ruined in a conventional way: responses to credit ratings’ role in credit crises. Northwestern Journal of International Law & Business, 29(1), 245-274.

Portes R. (2008). Ratings agency reform. In Felton A. & Reinhart C.M., ed. (2008), The first global financial crisis of the 21st century (pp. 145-149). Centre for Economic Policy Research, VoxEU.org Publication.

Richardson, M. & White, L.J. (2009). The rating agencies. Is regulation the answer? In Acharya, V.V. & Richardson, M. (Eds.), Restoring financial stability. How to repair a failed system (pp. 101-116). Hoboken, NJ: John Wiley & Sons.

Spreta, V. & Veldkamp, L. (2009). Ratings shopping and asset complexity: A theory of ratings inflation. Journal of Monetary Economics, 56(5), 678-695.

Stone, T. (2008, March 2). Rating agencies must put their house in order to restore trust. The Sunday Times.

U.S. Securities and Exchange Commission (SEC) (2009, September). Annual Report on Nationally Recognized Statistical Rating Organizations.

Yay S. (2010, July 28). The financial crisis of 2007: Roles of CDOs, CDSs and subprime mortgages, HPEC.491 Honors Project in Economics. Retrieved April 3, 2011, from <http://www.scribd.com/doc/42728437/The-Financial-Crisis-of-2007-Roles-of-CDOs-CDSs-and-Subprime-Mortgages>.

25



A conceptual and critical review of Accounting Standards in Bangladesh

Nikhil Chandra Shil

Assistant Professor, Department of Accounting American International University – Bangladesh

Banani, Dhaka – 1213 Bangladesh

ABSTRACT Accounting Standards is the basic infrastructure required for installing a strong accounting industry that produces all-pervasive information. Such requirements and usages of standards are proven in literature and the whole world gives the testimony. But, accounting industry differs from other industries in the sense that the output produced by this industry is used by all, where the whole world is under the same umbrella and where there is no segmentation whether physically or conceptually. Thus, today accounting standards are prepared and observed in an international context in the form of a set of international accounting standards and which are going to be replaced by international financial reporting standards, the latest version of standards till date. And countries are free to adopt the standards intact or with their required modifications, if necessary. In this paper, I have tried to explore the status of accounting standards as adopted and used in Bangladesh and some controversial issues are highlighted on the basis of conceptual reviews to give the paper a critical insight. Keywords: International Accounting Standards (IASs), International Financial Reporting Standards (IFRSs), Bangladesh Accounting Standards (BASs), Institute of Chartered Accountants of Bangladesh (ICAB), Institute of Cost and Management Accountants of Bangladesh (ICMAB).

INTRODUCTION Accounting is no longer a science of debit and credit. Though, I become surprise when some responsible people think that accounting is nothing but arithmetic operations like addition, subtraction, division and multiplication. One may try to prove it by referring the example of Luca Pacioli, the father of accounting, who gets the credit for documenting the double entry concept for the first time in a book written on arithmetic, geometry and proportion. The origination of accounting was in such a strange way. But now accounting is a separate and independent discipline that has everything in it. I must protest the comment that accounting is an offshoot of arithmetic. As the world is getting older, civilization getting more matured, accounting has also reached to the apex of sophistication. Now, accounting is a strong profession where the whole world talks, thinks and even behaves in the similar way. Such harmonization becomes possible due to the set of standards that are followed by the professionals across the world. Like other countries, Bangladesh also has standard setting organ, standard setting process and authorities to do the functions of a watchdog. In this paper, I have tried to do an assembling function. Historical background of accounting standards in this region is discussed followed by the discussion of standard setting authority and process followed to this effect.

26



Later, the current status of standards is discussed from a country perspective. Finally, the author tried to discuss some critical factors as identified by the author himself and some other bodies like World Bank (WB) with some suggestions that may raise debates. But, author believes that such debate may lead to some helpful and rigorous solutions to mitigate the problems that accounting professionals face here.

Background Initiative for the development of professional accountancy came from Scotland for the first time in 1854 when a group of accountants obtained the recognition of the Royal Charter, followed by English Institute in 1880. The idea spread in other countries and the UK accounting firms started establishing offices in other countries in the late 19th and early 20th century. Deloitte, Deve, Griffiths and Co. opened offices in 17 foreign cities between 1980 and 1914. The UK became the place of origin of accounting profession with the start of British industrialization when businessmen felt the necessity of professional services from accountants. The US accounting profession grew under the leadership of British Accountants (Carey, 1970, pp. 53-58). The British contingent served as a nucleus influencing the founding of American Association of Public Accountants in 1887 and the first president of the Association has been reported to be a Briton (Samuels and Piper, 1985, p.20). Since World War II, the USA replaced British and the influences over accounting and reporting by USA have increased substantially. For example, the Americans changed Japanese accounting code in September 1945 after Japan’s defeat in the Second World War. Similarly, accounting code and SEC of South Korea, Philippines and Taiwan were modeled following US Accounting System in line with US investment flow to these countries after the War. Accountancy Profession in Bangladesh has been transplanted through British Colonial Power. To provide reliable financial information to British investors the British auditors came in this part of the world. At a later stage, the branches of British affiliated accounting societies were established in India and Burma in 1932, and in Bengal in 1933 (Johnson and Caygill, 1971). Establishment of East India Company in 1600 and setting of its office in 1608 in Surat considered having significance influence over the development of British accounting and reporting methods in the whole of India as well as in the greater Bengal. In addition, enterprise accounting took shape by establishing offices of UK accounting societies in different parts of India and Bengal and had influenced accounting education and training in this region. In Bangladesh, the Institute of Chartered Accountants of Bangladesh (ICAB) works as an examining body for awarding chartered accountant certification and the licensing authority for members engaged in pubic practice, which was established in 1973 by a presidential order and was modeled as the Institute of Chartered Accountants of England and Wales.

IASs vs. IFRSs Accounting as an international discipline has passed another milestone in achieving greater recognition and use of IFRSs. IFRSs are the latest version of IASs. IASs were issued by the International Accounting Standards Committee (IASC) from 1973 to 2000. But the International Accounting Standards Board (IASB) replaced IASC in 2001 and standards issued by IASB are known as IFRSs. Since 2001, the IASB has amended or replaced some IASs, and has also proposed certain new IFRSs on topics for which there were no previous IASs. The adoption rate of IFRSs is slow as compared with the counter version of IASs. A major breakthrough came in 2002 when the European Union (EU) adopted legislation that requires listed companies in Europe to apply IFRS in their consolidated financial statements. The legislation came into effect in 2005 and applies to more than 7,000 companies in 28 countries, including countries such as France, Germany, Italy, Spain, and the United Kingdom. The adoption of IFRSs in Europe means that IFRSs replace national accounting standards and requirements as the basis for preparing and presenting group financial statements for listed companies in Europe. Outside Europe, many other countries are also moving to IFRSs. In 2005, IFRSs had become mandatory in many countries in Southeast Asia, Central Asia, Latin America, Southern Africa, the Middle East, and the Caribbean. In addition, countries such as Australia, Hong Kong, New Zealand, Philippines, and Singapore had adopted national accounting standards that mirror IFRSs. It was estimated that more than 70 countries required their listed companies to apply IFRSs in preparing and presenting financial statements in 2005.

27



INSTITUTIONAL FRAMEWORK FOR ACCOUNTING AND REPORTING IN BANGLADESH The Companies Act of 1994 provides basic requirements for financial reporting by all companies in Bangladesh. But, it is silent about either Bangladesh Accounting Standards (BASs) or International Accounting Standards (IASs/IFRSs). The Securities and Exchange Commission of Bangladesh regulates financial reporting of listed companies. The Securities and Exchange Rules, 1987 requires compliance with IASs/IFRSs as adopted in Bangladesh [Rule 12(2)]. The Bank Company Act of 1991 mandates reporting formats and disclosures based on BAS 30, which is similar to IAS 30. Section 38 of the Bank Company Act 1991 gives power to Bangladesh Bank to control accounting and reporting also. The Insurance Act 1938 does not mandate compliance with BASs. In practice, insurance companies often do not follow BASs, as there is no explicit requirement. Tax laws influence presentation and disclosure in general purpose financial statements. Neither the law nor the by-laws of ICAB mandates compliance with BASs by unlisted companies. Actual compliance varies widely.

Standard Setting Body The Institute of Chartered Accountants of Bangladesh (ICAB) is an autonomous body established under the Bangladesh Chartered Accountants Order, 1973 (President’s Order No 2 of 1973 of the people’s republic of Bangladesh) in 1973. It is a member of different accounting bodies like the International Federation of Accountants (IFAC), the International Accounting Standards Board (IASB), the South Asian Federation of Accountants (SAFA) and the Confederation of Asian and Pacific Accountants (CAPA). ICAB is the official standard setting body and also works as a regulatory body of the accounting profession in Bangladesh, however it has no legal mandate for setting accounting standards. Despite that, ICAB develops and issues BASs, which are not legally binding by corporate management. The ICAB expects its members, who prepare and audit financial statements, to observe the local standards. In this respect, ICAB has to work in close cooperation and collaboration with Securities and Exchange Commission (SEC), Bangladesh Bank, Stock Exchanges, Chambers of Commerce and Industries, National Board of Revenue (NBR) and other regulatory agencies. While formulating the Accounting Standards, the Technical and Research Committee (TRC) of the Council of the Institute tries to integrate the International Accounting Standards (IASs) with the local laws, conditions and practices. During the process of revision of existing Accounting Standards, all-out efforts are being made to narrow down (and, if possible, eliminate) differences with the corresponding IAS.

Standard Setting Process In Bangladesh, ICAB enjoys the supreme power to design standards and any other guidelines or manuals in the line of accounting and auditing. In Sri Lanka, some additional standards/Statements are prepared and sometimes in rare circumstances, modifications are effected to the IASs to meet the local criteria. These modifications are effected either to strengthen the standard concerned or to facilitate easy implementation. For instance, in respect of SLAS (Sri Lanka Accounting Standard) 40: Investment Property, when it comes to valuation, valuation by a professionally qualified valuer once in three years is mandatorily required. This is not so in the corresponding IAS 40. And, that is why; every Accounting Standard carries the IAS Compliance Statement as follows:

“Compliance with this Standard ensures compliance in all material respects with the International Accounting Standard (IAS) ………...”

Again, in India, the Research Committee of the Institute of Chartered Accountants of India formulates Guidance Notes on accounting, which is recommendatory in Nature. While developing Indian Accounting Standards, the IASs are taken as the basis and modifications are made only in the context of the conditions and practices prevailing in India. Unlike IASs/IFRSs, the Indian Accounting Standards do not contain the ‘Benchmark Treatment’ and ‘Allowed Alternative Treatment’ and provide to the extent possible, only one accounting treatment. In the case of Pakistan, Statement of Standard Accounting Practice (SSAP) 1 has been issued on “Classification of Stores and Spares in the Financial Statements”. In addition, the Institute

28



also issued Islamic Financial Accounting Standards. But in Bangladesh, the IASs/IFRSs are adopted with minor changes, if necessary. So Bangladesh requires no compliance statement like Sri Lanka. Even in Bangladesh, we do not have any additional standards/statements/notes like India and Pakistan. The standard setting process as followed in Bangladesh has every resemblance with the same of IASC/IASB. It starts with the identification of the broad areas by the Technical and Research Committee (TRC) for formulating the Accounting Standards. The TRC constitutes study groups for preparing the preliminary drafts of the proposed Accounting Standards. The preliminary drafts as prepared by the study groups are considered for revision, if any, by the TRC on the basis of deliberations and such revised drafts are circulated among the members and councilors of ICAB for comments. Then, the TRC meets with the representatives of specified outside bodies on necessity basis to ascertain their views on the drafts of the proposed Accounting Standards. The Exposure Drafts of the proposed Accounting Standards are then finalized on the basis of comments received and discussions held with specified outside bodies. The Exposure Drafts are issued inviting comments thereon by the members. The comments on the Exposure Drafts as received are considered and the draft of Accounting Standards on the basis of the same are finalized for submission to the Council–ICAB for consideration and approval thereon. The Council – ICAB reviews the draft Accounting Standards and if found necessary, modifies the drafts in consultation with the TRC. The Accounting Standards, so finalized, are issued under the authority of the Council–ICAB. The accounting standards issued by the ICAB are recognized as the Bangladesh Accounting Standards. Endorsement of any other body is not required to this effect. Securities and Exchange Commission of Bangladesh (SECB) requires the listed companies, through Listing Regulations of the Exchanges to comply with the BangladeshAccounting Standards issued by the ICAB vis-à-vis International Accounting Standards (IAS) from time to time.

THE CURRENT STATUS OF IASS/IFRSS IN BANGLADESH In most of the countries, the IASs/IFRSs are adopted. Because, these are the international standards that are set in a pragmatic, rigorous and democratic way to meet the challenges of harmonization of accounting practice and to establish accounting as a strong profession as well. The total number of IASs/IFRSs applicable for SAFA countries are 36 as given below with effective date wise breakdown.

In Bangladesh, ICAB has developed 16 BAS on the basis of IAS. However, as revised IASs are issued, the BASs are not updated. Moreover, 18 IASs have no counterparts in BAS. The current statistics reveal that

Particulars Numbers Number of IASs / IFRSs as per 2006 IAS/IFRS Bound Volume

Less: IASs/IFRSs withdrawn / superseded Less: IASs not relevant to SAFA countries (IAS – 29: Financial Reporting

in Hyperinflationary Economies)

IASs / IFRSs relevant to SAFA countries

Breakdown of IASs/IFRSs as per effective dates

IASs/IFRSs with an Effective Date prior to 31.12.1999 IASs/IFRSs with an Effective Date between 01.01.2000 to 31.12.2004 IASs/IFRSs with an Effective Date between 01.01.2005 to 31.12.2005 IASs/IFRSs with an Effective Date between 01.01.2006 to 31.12.2006 IASs/IFRSs with an Effective Date after 01.01.2007 Total

48 11

01

36

9 4

12 9 2

36

29



ICAB has adopted all of the 36 IASs/IFRSs as BASs/BFRSs as shown below.

Bangladesh Description

IASs/IFRSs

Adopted / Adapted (A)

Under Review

IASs/IFRSs with an Effective Date prior to 31.12.1999 9

9

- IASs/IFRSs with an Effective

Date between 01.01.2000 to 31.12.2004

4 4

-

IASs/IFRSs with an Effective Date between

01.01.2005 to 31.12.2005 12 11 1

IASs/IFRSs with an Effective Date between

01.01.2006 to 31.12.2006 9 6 3

IASs/IFRSs with an Effective Date after 01.01.2007 2 1 1

31 5 IASs/IFRSs

Adopted/Adapted/Under Review 36

36

Scope of IASs/IFRSs in Bangladesh The standards issued by ICAB are applicable to Registered Companies and Statutory Bodies/Corporations in Bangladesh. It is mandatory for all Listed Companies. And it is recommendatory at the same time for all other Public and Private Companies and also for Statutory Bodies including autonomous and semi autonomous bodies/corporations The companies are required to file their accounts with the Registrar of joint stock companies and firms, which is the Directorate Office under the Ministry of Commerce. ICAB has also directed to its members to examine compliance with accounting standards in the presentation of financial statements covered by their audits. ICAB recently developed and distributed amongst members a standards disclosure and compliance checklist for their use. ICAB has a committee named Compliance Monitoring that monitors the compliance of the standards on random basis. On the findings of the Committee, ICAB Council takes appropriate measures wherever applicable on the members at fault. Small and medium–size enterprises do not fall within the scope, as there is no financial reporting framework specially designed for them.

ACCOUNTING STANDARDS IN BANGLADESH: A CRITICAL ANALYSIS Standards require some factors/prerequisites to be present for its successful implementation. In Bangladesh, we have standards and everything but still these are not enough. Sometimes, it seems that the use of standards in our country is limited to the declaration of the auditors in the opinion paragraph of their audit report audited by them, which read like:

“The financial statements are prepared in conformity with the international accounting

standards and Bangladesh Accounting Standards and represent a true and fair view of the affairs of the company”

If the perception of users from professional accountant is like that, the standards will produce nothing. The situation is worst when auditor audits account prepared by them. In some situations, auditors have audit engagement to prepare the accounts and to give an opinion on the accounts, which is prepared by them. Again, the legal environment in Bangladesh are not supportive rather conflicting in some cases. For

30



example, the Companies Act 1994 requires capitalization of gains and losses arising from changes in foreign exchange rates under all circumstances which is inconsistent with IAS. There are further inconsistencies between accounting and reporting requirements as required by the Companies Act 1994 and SEC regulations. The Companies Act 1994 allows both sole practitioners and partnership firms to act as auditors whereas partnership firms with seven years experience in professional practice are allowed to audit listed companies under SEC rules. The SEC also requires auditor rotation once every three years, except where the company declares dividends at a rate prescribed by the SEC, in which case the same auditor can hold offices for further periods. The relationship of auditors’ continuance with the rate of dividend declaration is unfounded and I believe that, under such a situation, auditors often compromise his independence to hold office. Again, taxation authorities do not accept some IAS compatible accounting treatments for determining taxable profit, for example, recognizing finance leases, prior period adjustments and expensing of pre-operation costs. The capacity of professional bodies, both ICAB and ICMAB, is required to be strengthened. Sometimes, professionals are found to be unethical for noncompliance. In most of the cases, articled students do majority of the audit work and sometimes they also prepare reports. The principal or partner just endorses the report as they hold the power to do so. Isn’t the function of a professional accountant is self-contradictory here when he (principal/partner) is signing the report where he has no contribution? The situation is more disappointing when there is no audit procedure designed for the articled students. In Bangladesh, majority of the audit firms have no audit procedure and if you ask the articled students regarding it, they give varied replies. So, they sometimes design their procedures at their discretionary. Even, in one situation, the author gets the idea from a principal that he has no idea regarding the application of deferred taxes. One more interesting thing is that every qualified professional accountant is required to avail certain continuing professional education (CPE) or continuing professional development (CPD) hours as per IFAC requirements. The program sometimes is limited to giving a signature in the signature sheet to avail the credits only. Accounting is the disregarded subject in Bangladesh. It is the last choice in the Dhaka University, the premier university of the country, to the first year honors student. In most of the private universities, there is no concentration (major) in accounting. Some universities offer major in accounting where the quality and number of students are so poor. Even the pressure in the professional institutes, both ICAB and ICMAB, is also in a decreasing trend. I always try to get answers from students and the answer is more or less same that there is no job for a student who has major in accounting. The answer is well founded. 10-15 of banks and insurance companies out of 90 employs professional accountants. Out of 52 SoEs only 14 have accounting professionals and others do not. In the 250 listed companies, only 30 employed qualified accountants and balance do not. Government of Bangladesh does not employ any professional accountant. The facts reveal the magnitude of the poor state of public accountability in Bangladesh and the need for reassessment of the professional accountant. The author believes that in the market there is misconception. The employers do not think that they need accountants to do specific works. The real practice is that non-accountant does the functions of an accountant. That is why the demand side for accountant is very poor which turns the student to go for other areas as concentration. In response to the attitude of employers most of the private universities do not offer degrees in accounting. Even, World Bank team, in their report on the Observance of Standards and Codes (ROSC), reported that the curriculum and teaching in accounting programs of universities and colleges should be updated which is the demand of time.

Way Out From 1993 to 2000, we have had some improvements that contribute a lot to corporate financial reporting. The Securities and Exchange Commission (SEC) was established in 1993 under the SEC Act of 1993. A new Companies Act was enacted in 1994 that came into force from October 1, 1995, replacing the Companies Act of 1913. In October 1997, the SEC amended the Securities and Exchange Rules (SER) of 1987 to require the listed companies to prepare half-yearly financial statements within one month of the

31



close of the first half-year of its accounting year and issue those statements to the stock exchange(s) in which its securities are listed, to holders of its securities and to the Commission. The share market scandal of 1996 has revealed willful malpractice of some of the directors of the listed companies and share brokers of the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) on the one hand and poor control of the regulatory bodies on the other and absence of time provision of reliable financial information in the market (Report of the Enquiry Committee, 1998). After the stock market debacle in 1996, the SEC has been insisting the listed companies on holding Annual General Meetings (AGMs) and publishing up to date annual reports. On January 4, 2000, the SEC amended the SER 1987, to require, among other things, that the financial statement of an issuer shall be audited within 120 days or within a period as extended by the SEC.

These are not enough. Now we need an action plan to find out the inconsistencies among different requirements by different laws and regulations. Once the inconsistencies are found out, all of the acts, rules, regulations and ordinances are required to be updated in line with different accounting and reporting standards in force to suggest similar treatment. The work may be simpler if we have a separate Financial Reporting Act that ultimately repeals all provisions on accounting, auditing and financial reporting in different acts, rules and regulations in force. Only then, harmonization of practice within the country can be established which ultimately leads to global harmonization. Then, the capacity of both ICAB and ICMAB should be strengthen. The professional accountants’ code of ethics needs updating in line with the IFAC code of Ethics for Professional Accountants issued in November 2001.

One independent oversight body in the form of “Financial Reporting Council” should be established for adoption, monitoring and enforcement of standards with respect to financial reporting by the public-interest entities. It will reduce compliance gaps significantly. One example is enough to clarify the volume of compliance gaps. In a review of financial statements for a period up to February 2003, SEC staffs identified 16 listed companies that appeared to have disclosure deficiencies and/or indications of accounting manipulations though all of these statements received unqualified audit opinion. When SEC made arrangements for second audit by auditors from five selective firms, management of three companies challenged it and obtained court orders in support of them. In the case of the other 13 companies, various infractions were discovered.

The responsibility of setting standards, oversight function, licensing and auditing may be segregated to different bodies. Private sectors may be charged with setting standards. For example, in New Zealand any organization can develop and submit accounting standards to the Accounting Standards Review Board (ASRB) for approval. To date, the Financial Reporting Standards Board (FRSB) of the Institute of Chartered Accountants of New Zealand submitted all standards to the ASRB for approval. Standards setting structures in the U. S. A., the U. K., Japan, and Australia are independent of the accounting profession. Different group of stakeholders should represent in all of the bodies. There are three different groups of stakeholders in the accounting standard setting activity, e.g., preparers, users and auditors. All of the bodies should comprise of the representatives of preparers, users, auditors, academia, the legal profession, regulators (e.g., the SEC in Bangladesh), the business community, and government. It is to be noted that the Committee on Accounting Procedures (CAP) and the Accounting Principles Board (APB) set accounting standards in the U. S. A. prior to the FASB. Both the CAP and the APB were committees of the American Institute of Certified Public Accountants (AICPA) and were comprised of only members of the AICPA. But both the CAP and the APB failed due in part to their inability to take other groups’ viewpoints into consideration (Moonitz, 1974). The professional institutes may take initiative through auditors to give suggestions to employers to employ more and more accountants that will create demands for accounting graduates and supply shortage will be met up very shortly. Students will be motivated to take accountancy as a profession and challenge as well.

32



CONCLUSION Standards have a separate meaning in religion or in logical science. It is a sort of code of conduct or some ethical conduct over which we all are bound to abide by. For accounting profession also, we need standards with the guarantee that they are implemented in the same meaning for which they are being developed. The forgoing discussion concludes that Bangladesh is not in a good position from a professional perspective. Transparency International Bangladesh (TIB) has rightly rated Bangladesh as number one corrupted country for a last couple of years and there is every possibility of such continuance for an indefinite period of time if the current structure remains unchanged. The evidences during this Caretaker Government (CG) certify that there is no or minimum accountability at national level by the main stakeholders of the country. Accounting may be used in such a situation to ensure accountability at corporate level and national level as well. But, this is not possible under the current status of accounting. We need a radical change that is not impossible if we really want it to happen. We have to make the standard setting processes streamlined with international aspects, we need strong bodies comprising members from different stakeholder groups, we need Financial Reporting Act to have a generalized guideline/treatment for accounting and reporting in every respect and situations and we need strong institutional framework to support it. All of these are basic infrastructures required for installing a strong professional accounting base. To change the current erratic structure that we have in every spheres of our national life, we need such a profession which will make every people bound to discharge their responsibilities and to prove their accountability level. REFERENCES

Cyert, R. M. and Y. Ijiri (1974), “Problems of implementing the Trueblood Report,” Journal of Accounting Research 12 (supplement): pp. 29-42.

Financial Accounting Standards Board (FASB) 1978, Objectives of Financial Reporting by Business Enterprises. Statement of Financial Accounting Concepts No. 1 (Stamford, Connecticut: FASB).

Financial Accounting Standards Board (FASB), (1981), Annual Report of the Financial Accounting Standards Board (Stamford, Connecticut: FASB).

Gaa, J. C. (1988), Methodological Foundations of Standardsetting for Corporate Financial Reporting. Studies in Accounting Research # 28 (Sarasota: American Accounting Association).

Horngren, C. T. (1973), “The marketing of accounting standards,” The Journal of Accountancy (October): pp. 61-66.

Institute of Chartered Accountants of Bangladesh (ICAB), (2004), Bangladesh Accounting Standards (BAS), Volume I and II. Dhaka: ICAB.

International Accounting Standards Board (IASB) (2001), Framework for the Preparation and Presentation of Financial Statements (London: IASB).

International Accounting Standards Board (IASB), (2004), Discussion Paper Preliminary Views on Accounting Standards for Small and Medium-sized Entities (London: IASB).

Kabir, M. Humayun. (2005), Setting Accounting Standards: Bangladesh and International Perspectives. The Cost and Management. Vol. 33. No. 6, pp. 5-17.

Kelly-Newton, L. (1980), Accounting Policy Formulation- The Role of Corporate Management (Massachusetts: Addison-Wesley Publishing Company).

Lenihan, D. G. and D. Hume (2003), A Question of Standards: Accounting in the 21st Century (Canada: Centre for Collaborative Government).

Mackenzie, A. (2003), Reports to Certified General Accountants Association of Canada on Accounting Standard Setting Structures (CGA-Canada).

Moonitz, M. (1974), Obtaining Agreement on Standards in the Accounting Profession. Studies in Accounting Research # 8. American Accounting Association.

Public Sector Accounting Standards Board (PSASB) and Accounting Standards Review Board (ASRB) (1990), Definition of the Reporting Entity. Statement of Accounting Concepts SAC 1 (Victoria: Australian Accounting Research Foundation and Accounting Standards Review Board).

Report on the Observance of Standards and Codes (ROSC) (2003), World Bank.

33



South Asian Federation of Accountants (SAFA), Accounting Standards vis-à-vis IAS/IFRS & Standard Setting Process - A Comparative Analysis, Center of Excellence for Standards & Quality, The Institute of Chartered Accountants of Sri Lanka

Securities and Exchange Commission (SEC) (2000), International Accounting Standards. SEC Concept Release.

34



Corporate Governance Disclosure Practices In India: An Empirical Study

Dr. Madan Bhasin

Associate Professor of Accounting, School of Management

New York Institute of Technology (NYIT) Adliya, Manama

Kingdom of Bahrain

ABSTRACT

Nowadays, disclosure about CG is a fundamental theme of the modern corporate regulatory system, which encompasses providing information by a company to the public in a variety of ways. In the light of CG compliance requirements and mandatory/non-mandatory disclosure standards, as envisaged by the recent provisions of the SEBI’s “Clause 49 of the Listing Agreement,” this ‘empirical’ case study analyzes the CG disclosure practices in India. We have primarily used secondary sources of information, both from the Report on CG and the Annual Report of Reliance Industries Limited (RIL), for the financial year 2006-2007. In fact, Reliance group is India’s largest private-sector enterprise, and annual revenues are in excess of US$ 28 billion. Undoubtedly, it is one of the well-known business groups, which emphasizes a lot on maximizing the shareholders’ values. In this exploratory case study of RIL, we had developed our own model as a “working method”. In order to ascertain how far this company is compliant of CG standard, a “point-value-system” had been applied. Based on the disclosures made by the Company in its Annual Report and an in-depth evaluation of the results reveals that this company has shown “very good” performance, with an overall score of 85 points. This descriptive study is expected to serve as a pointer to the effectiveness of current CG disclosure practices especially in RIL, and the Indian corporate sector, in general. Despite some limitations, this case study will help us to pinpoint the effectiveness of CG practices followed by the Reliance group. Based on the findings of this study, we can conclude that RIL group is in the forefront of implementation of “best CG practices in India,” but some scope still exists for its improvement. It is worth mentioning here that RIL had won the “Golden Peacock Global Award for Excellence in Corporate Governance” for the year 2008. Keywords: Corporate Governance, Disclosure Practices, Empirical, Case Study, SEBI’s Clause 49, Listing Agreement, RIL and India.

INTRODUCTION In view of the current economic downturn, corporate governance (CG, in brief), and the reporting of that governance, may become a more pressing issue for the listed companies, particularly if it relates to going-concern reporting, risk management, internal controls, board balance, and directors’ remuneration. It should be noted at the outset that disclosure of information by a Corporation is like a double-edge sword in the management’s hands. Disclosures about the firm’s human resources, risk, and the like, are likely to be effective in reducing information asymmetries and mitigating their need for price protection. On the

35



other hand, disclosures about the marketing strategies, R&D, technology, etc., might jeopardize the firm’s competitive advantage. Therefore, by and large, companies are reluctant to disclose the relevant information which could tarnish their image. In this context, Healy and Palepu (2001), states, “disclosure of information enables the shareholder to evaluate the management’s performance by observing, how efficiently the management is utilizing the company’s resources in the interest of the principal.” Accountability, transparency, fairness, and disclosure are the four basic “pillars” of the modern corporate regulatory system, and involve the provision of information by companies to the public in a variety of ways. Solomon (2004), for instance, pointed out that disclosure can be viewed from two perspectives: corporate disclosure and financial accounting disclosure. Therefore, information and its “true-and-fair” disclosure are the areas where company law and accounting regulations join hands together. It is a key objective of accounting rules, in general, to ensure that users’ have sufficient and timely availability of information in order to participate in the market, on an informed basis (Dragomir et al., 2009). According to the OECD’s (2006) ‘Guidance on Good Practices in Corporate Governance Disclosure,’ “All material issues relating to CG of the enterprise should be disclosed in a timely fashion. The disclosure should be clear, concise, precise, and governed by the substance over form principle.” However, disclosure requirements can sometime provide a more efficient regulatory tool, than substantive regulation, through more or less detailed rules. Substantive law, in fact, deals with rights and duties that are not matters purely of practice and procedure. Such disclosures, however, create a lighter regulatory environment and allows for greater flexibility and adaptability. To sum up, disclosure is the foundation of any structure of CG. During the 1990s, a number of high-profile corporate scandals in the USA (viz., Lehman Brothers, AIG Insurance, Xerox, Arthur Anderson, Enron, WorldCom, Tyco, etc.) and also elsewhere in the world, triggered an in-depth reflection on the regulatory role of the government in protecting the interests of shareholders. Thus, to redress the problem of corporate misconduct, ensuring ‘sound’ CG is believed to be essential to maintaining investors’ confidence and good performance. In view of the growing number of scandals and the subsequent wide-spread public and media interest in CG, a plethora of governance ‘norms’ and ‘standards’ have sprouted around the globe. For instance, the Sarbanes-Oxley legislation in the USA, the Cadbury Committee recommendations for the European Union (EU) companies, and the OECD principles of corporate governance, are perhaps the best-known among these. The Cadbury Committee (1992) advocated, first of all, disclosure as “a mechanism for accountability, emphasizing the need to raise reporting standards in order to ward-off the threat of regulation.” Similarly, the Hampel Committee (1998) regulated disclosure as “the most important element of accountability and in introducing a new code and set of principles stated that their objective was not to prescribe corporate behavior in detail but to secure sufficient disclosure so that investors and others can assess companies performance and governance practice and respond in an informed way.” Well, over a hundred different codes and norms have been identified in recent surveys and their number is steadily increasing. Fortunately, India has been no exception to this rule. In the last few years the thinking on the CG topic in India has gradually crystallized into the development of norms for listed companies. However, there is no doubt that gradually “improved” disclosure requirements, across all over the world, will ultimately protect the long-term interest of shareholders and all other stakeholders. Frankly speaking, corporate disclosure by a company is a most powerful communication tool. For example, Collett (2005) asserts that CG issues have become so significant that it is likely firms use information about them for “impression management.” Appropriate corporate disclosure (or reporting) systems means that a good company is able to impress the markets with its integrity. As Dragmore (2009) remarked, “New regulations, new requirements and ever-increasing demands for transparency determine companies to follow the recent trends in corporate reporting in order to comply with ‘best practice’ regulations: narrative reporting, balance in the structure of the reports, inclusion of management report, reporting corporate governance and social responsibility, balancing financial and non-financial information, comparability over time, etc.” The quality of ‘financial and non-financial’ disclosures, however, depends significantly on the robustness of the reporting standards on the basis of which the financial/non-financial information is prepared and reported. “In addition, disclosure indicates the quality

36



of the firm’s product and business model, its growth strategy and market positioning, as well as the risks it is facing” (Chahine and Filatotchev, 2008).

All material issues relating to CG of the enterprise should be disclosed in a timely fashion. The disclosure should be clear, concise, precise, and governed by the “substance over form” principle.” As a matter of principle, all relevant information should be made available to the users in a cost-effective and timely way, preferably through the Websites of the relevant government authority, the Stock Exchange on which the enterprise is listed (if applicable), and the enterprise itself (OECD). Whatever disclosures are made and whatever channels are used, a clear distinction should be made between audited and unaudited financial information, and matters of validation of other non-financial information should be provided. The enterprise should disclose awards or accolades for its good CG practices. Especially where such awards or recognition come from major rating agencies, stock exchanges or other significant financial institutions, disclosure would prove useful since it provides independent evidence of the state of a company’s CG. Unfortunately, the location of CG disclosures within the Annual Report of a Corporation is not generally well-defined, and can vary substantially across-country in practice. However, some degree of “harmonization” of the location of CG disclosures would be desirable to make the relevant data more accessible, in the long-run. Two possible approaches include: first, putting all CG disclosures in a “Separate Section” of the Annual Report, and second, in a stand-alone “Corporate Governance Report”. Examples of the former approach are found in the recommendations of the Hong Kong Society of Accountants, and the listing requirements in India and Switzerland, which provide for CG disclosures to appear in a “separate section” of the Annual Report and in a prescribed format. Where CG disclosures are not consolidated, there should be sufficient cross-referencing to different disclosures to improve access to the information. Even where disclosure requirements exist, there is usually substantial latitude afforded to managers in relation to the quality and quantity of disclosure about company-specific governance practices (Labelle, 2002).

In view of the current economic downturn, corporate governance and the disclosure of that governance may become a more pressing issue for the listed companies; particularly insofar as it relates to going-concern reporting, risk management, internal controls, board balance and directors’ remuneration (PWHC 2008). However, India as a developing country has not fallen behind. The current requirements for disclosure of CG practices in India have developed from a reform process that began in the late 1990s. In fact, there have been several CG initiatives launched in India since the mid-1990s. The first was by the Confederation of Indian Industry (CII), which came up with the “first” Voluntary Code of CG in 1998. The second was by the SEBI, now enshrined as Clause 49 of the listing agreement. The third was the Naresh Chandra Committee, which submitted its report in 2002. The fourth was again by SEBI—the Narayana Murthy Committee, which also submitted its report in 2002. Based on some of the recommendation of these two committees, SEBI revised Clause 49 of the listing agreement in August 2003. In the last few years, the thinking on the topic in India has gradually “crystallized” into the development of norms for listed companies. The problem for private companies, which form a vast majority of Indian corporate entities, unfortunately remains largely unaddressed. It should be noted here that even the most prudent norms can be hoodwinked in a system plagued with widespread corruption. Nevertheless, with industry organizations and chambers of commerce themselves pushing for an improved CG system, the future of CG in India promises to be distinctly better than the past. We briefly review, in the next section, the developments relating to Clause 49 of the Listing Agreement requirements for disclosure of financial and non-financial information in CG reports.

CLAUSE 49: LISTING AGREEMENT The term ‘Clause 49’ refers to clause number 49 of the Listing Agreement between a company and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian stock exchanges, including the NSE and BSE).

37



This clause is a recent addition to the Listing Agreement and was inserted as late as 2000 consequent to the recommendations of the Kumar Mangalam Birla Committee on Corporate Governance constituted by the “Securities Exchange Board of India (SEBI)” in 1999. Clause 49, when it was first added, was intended to introduce some basic CG practices in Indian companies and brought in a number of key changes in governance and disclosures (many of which we take for granted today). Patel (2006) “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&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.” In late 2002, the SEBI constituted the Narayana Murthy Committee to “assess the adequacy of current corporate governance practices and to suggest improvements.” Based on the recommendations of this committee, SEBI issued a modified Clause 49 on October 29, 2004 (the ‘revised Clause 49’) which came into operation on January 1, 2006. The revised Clause 49 has suitably pushed forward the original intent of protecting the interests of investors through enhanced governance practices and disclosures. Five broad themes predominate: the independence criteria for directors have been clarified; the roles and responsibilities of the board have been enhanced; the quality and quantity of disclosures have improved; the roles and responsibilities of the audit committee in all matters relating to internal controls and financial reporting have been consolidated; and the accountability of top management (specifically the CEO and CFO) has been enhanced. Within each of these areas, the revised Clause 49 moves further into the realm of global best practices (and sometimes, even beyond). As Chakrabarti (2008, p64) states: “Similar in spirit and scope to the Sarbanes-Oxley measures in the USA, Clause 49 has clearly been a milestone in the evolution of CG practices in India.” The revised Clause 49 has suitably pushed forward the original intent of protecting the interests of investors through enhanced governance practices and disclosures. No doubt, the quality and quantity of disclosures have improved. Corporate managers and investors agree that while it can be argued that complying with these requirements involves a significant amount of effort, there can be no doubt that these are an essential step towards bringing Indian capital markets and governance standards in line with the rest of the world. Clearly, at least the companies with best-in-class governance practices (like Reliance, Tata, Hindustan Lever, Infosys, etc.) are steeling themselves for this process. Most have already taken the first steps down this path. Although all of them are concerned about the costs involved, most are aware that this is a process which yields substantial benefits in the long run as the US experience is beginning to show.

India has the largest number of listed companies in the world, and the efficiency and well being of the financial markets is critical for the economy in particular and the society as a whole. It is imperative to design and implement a dynamic mechanism of CG, which protects the interests of relevant stakeholders without hindering the growth of enterprises. With the SEBI guidelines (Clause 49) demanding the listed Indian companies to adopt and follow the CG norms, it became necessary for every organization to ensure higher shareholder and stakeholder values. The SEBI envisages that all these CG norms will be enforced through listing agreements between companies and the stock exchanges (Chakrabarti, 2008). A little reflection suggests that for companies with little floating stock delisting because of non-compliance is hardly a credible threat. The SEBI can, of course, counter that by stating that the reputation effect of de-listing can induce compliance and, hence, better corporate governance. Thus, what is needed a small corpus of legally mandated rules, buttressed by a much larger body of self-regulation and voluntary compliance. “It is now mandatory for the companies to file with the SEBI, the CG compliance report, shareholding pattern along with the financial statements. The SEBI has created a separate link known as Edifar to post the relevant information submitted by the company.” (Sharma and Singh, 2009)

38



REVIEW OF LITERATURE

Across the globe, CG has attracted considerable attention over the past decades, leading to recommended codes of best practice, conceptual models, and empirical studies. There is no denying the fact that transparency is an important component of a well-functioning system of CG. However, corporate disclosure to stakeholders is the principal means by which companies can become transparent (Solomon and Solomon, 2004).

Collett and Hrasky (2005) analyzed the relationships between voluntary disclosure of CG information by the companies and their intention to raise capital in the financial market. A sample of 299 companies listed on Australian stock exchange had been taken for the year 1994 and Connect-four database had been used for collection of annual reports of companies. The study found out that “only 29 Australian companies made voluntary CG disclosure, and the degree of disclosures were varied from company to company.” Similarly, Barako et al., (2006) examined the extent of voluntary disclosure by the Kenyan companies over and above the mandatory requirements. This study covered a period of 10 years from 1992 to 2001. The results revealed that “the audit committee was a significant factor associated with level of voluntary disclosure, while the proportion of non-executive directors on the board was negatively associated.”

Recently, CG has received much attention in the Asian countries due to its financial crisis. For example, Gupta, Nair and Gogula (2003) analyzed the CG reporting practices of 30 selected Indian companies listed in BSE. The CG section of the annual reports for the years 2001-02 and 2002-03 had been analyzed by using the content analysis, and least square regression technique was used for data analysis. The study found “variations in the reporting practices of the companies, and in certain cases, omission of mandatory requirements as per Clause 49.” Bhattacharyya and Rao (2005) examine whether adoption of Clause 49 predicts lower volatility and returns for large Indian firms, they compare a one-year period after adoption (starting June 1, 2001) to a similar period before adoption (starting June 1, 1998). The logic is that Clause 49 should improve disclosure and thus reduce information asymmetry and thereby reduce share price volatility. The authors find insignificant results for volatility and mixed results for returns.

In another study undertaken by Subramanian (2006), he identified the differences in disclosure pattern of financial information and governance attributes. A sample of 90 companies from BSE 100 index, NSE Nifty had been taken. The data with respect to disclosure score had been collected from the annual reports of the companies for the financial year 2003-04. The study used the Standard & Poor’s “Transparency and Disclosure Survey Questionnaire” for collection of data. The study finally concluded that “there were no differences in disclosure pattern of public/private sector companies, as far as financial transparency and information disclosure were concerned.” Similarly, K. C. Gupta (2006) traced out the differences in CG practices of few local companies of an automobile industry. The data with respect to governance practices had been collected from the annual report of the companies for the year 2004-05. The study “did not observe significant deviations of actual governance practices from Clause 49.”

The aforesaid review of studies reveals that there is an urgent needs to study the CG disclosure practices (mandatory and/or voluntary) followed by the companies in India. Since CG is in the process of gradual evolution in India, therefore, this paper attempts to study the CG practices followed by the Reliance Industries Limited (RIL). The Reliance group is India’s largest private sector enterprise and group’s annual revenues are in excess of US$ 28 billion. The flagship company, RIL is a Fortune Global 500 company and the Group’s activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fiber intermediates, plastics and chemicals), textiles, retail and special economic zones. Undoubtedly, Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fiber producer in the world, and among the top five to ten producers in the world in major petrochemical products.

39



SIGNIFICANCE OF THE STUDY In India, the question of CG has assumed importance mainly in the wake of economic liberalization, deregulation of industry and business, as also the demand for a new corporate ethos and stricter compliance with the legislation. However, there have been several leading CG initiatives launched in India since the mid-1990s. The first was by the CII, which came up with the first “voluntary” code of corporate governance in 1998. As Bhatt (2007) remarks: “In 1996, CII took a special initiative on CG—the first institutional initiative in Indian industry.” In April 1998, India produced the first substantial code of best practice on CG after the start of the Asian financial crisis in mid-1997. Titled “Desirable Corporate Governance: A Code”, this document was written not by the government, but by the Confederation of Indian Industries (www.ciionline.org). It is one of the few codes in Asia that explicitly discusses domestic CG problems and seeks to apply best-practice ideas to their solution.

The next big move was by the SEBI, now enshrined as Clause 49 (very similar to the U.S. Sarbanes-Oxley Act, 2002) of the listing agreement. In late 1999, a government-appointed committee under the leadership of Shri Kumar Mangalam Birla (Chairman, Aditya Birla Group) released a draft of India’s first national code (Clause 49) on CG for listed companies. The code, however, was approved by the Securities Exchange Board of India (SEBI) in early 2000 and was implemented in stages over the following two years (applying first to newly listed and large companies). It also led to changes in the stock exchange listing rules. The Naresh Chandra Committee and Narayana Murthy Committee reports followed it in 2002. Based on some of the recommendation of these two committees, SEBI further revised the Clause 49 of the listing agreement in August 2004. “The provisions of the SEBI’s Clause 49 closely mirror those of Sarbanes-Oxley in the U.S.”

Very recently, reform of the Central Public Sector Enterprises (CPSEs) is high on the Indian government’s agenda. Strong PSEs would be better prepared to enter the capital market to raise funds, which means practices must be in place to ensure accountability. Even though these guidelines are voluntary, all CPSEs (both listed and non-listed) are meant to follow them, with compliance of these guidelines to be referred to in the Directors’ report, Annual report and the chairman’s speech during the Annual General Meeting. The Department will grade the companies on the basis of their compliance with the guidelines. Issued on an experimental basis for a year, they will be revised “in the light of experience gained”. The Department of Company Affairs had set up “National Foundation for Corporate Governance” (www.nfcgindia.org) in partnership with CII, ICAI, and ICSI. In addition, the ICSI has constituted annual awards for the companies with best governance practices. Thus, in CG practices India can be proud of what it has achieved so far, initially voluntarily and later under guidance of various regulators, while recognizing that obviously much more needs to be still done. While India’s CG framework is advanced for a developing country, it still can be significantly improved.

With the SEBI guidelines (Clause 49) demanding the listed Indian companies to adopt and follow the CG norms, it became necessary for every organization to ensure higher shareholder and stakeholder values. RIL is one of the well-known Indian business groups, which emphasizes a lot on shareholder values. No doubt, Reliance brand has stood for its trust and confidence for the past several decades. This paper explores and studies the CG practices of the Reliance Group using the case study method. Since CG is in the process of evolution in India, therefore, this descriptive study would attempt to examine the CG practices followed by the Company. For the purpose of this research work, we are going to use “case study” approach to analyze the CG practices of the Indian firm. In order to assess the structure and processes for CG followed by RIL, we have conducted this study based on disclosure/reporting requirements, as stipulated by the Securities Exchange Board of India’s revised Clause 49 of the Listing Agreement. The Reliance group is India’s largest private-sector enterprise and group’s annual revenues are in excess of US$ 28 billion. This flagship company is a Fortune Global 500 company. It is worth mentioning here that since RIL is the largest private-sector firm, therefore, its CG practices will certainly attract a lot of media attention and may prove to be an exemplifier trend-setter in the Indian corporate world.

40



RESEARCH METHODOLOGY FOLLOWED

This research work uses the “case study” approach to analyze the CG practices of the Indian firm. The firm included in the research work is India’s largest private-sector firm, operating in the textile, synthetics and petrochemical industry, namely Reliance Industries Limited (RIL, www.ril.com). The Reliance Group’s annual revenues are in excess of US$ 28 billion and the flagship company, Reliance Industries Limited, is a Fortune Global 500 company. The firm is a part of both the BSE Sensex and the NSE Nifty. This company has been selected on the ground that it is the largest private sector firm and its share prices influence the movement of the Indian stock market. RIL’s business interests and product portfolio include: refining, polymers, chemicals, fiber intermediaries, polyester, textiles, retails etc. It has achieved a record turnover of Rs. 118,354 crore with EBDIT of Rs. 20,525 crore in the financial year 2006-07. RIL is India’s first company in the private sector to achieve a net profit exceeding Rs. 10,000 crore. The net profit of RIL for the year 2006-07 was Rs. 11,943 crore.

After having an overview of the concept of CG disclosure and the Indian experience, CG as practiced in the RIL is discussed in detail. The research involves review of literature pertaining to Reliance group in general and CG at Reliance in particular, which is the secondary data. A few unstructured and informal interviews with some of the executives across the Reliance group were also conducted, to get the primary data on the research topic. The annual reports of the RIL were also reviewed with special reference to “CG Best Practices,” as described in the Report on CG.

The reason for selection of the said period is that the annual report for the year 2006-2007 would give a glimpse of the state of the latest CG practices and disclosure norms in the light of the latest SEBI Clause 49 of the Listing Agreement as also the amended Company Law. In order to assess the structure and processes for CG followed by RIL and its effectiveness in terms of substance and quality of disclosure of CG in the annual report, we have conducted the study based on statutory and non-mandatory requirements stipulated by the revised Clause 49 of the Listing Agreement, as also the provisions required by the Companies Act, 1956.

Reliance is in the forefront of implementation of CG “best practices”. Keeping in view the Company’s size, complexity, global operations and corporate traditions, the Reliance governance framework is based on the following principles:

Constitution of a Board of Directors of appropriate composition, size, varied expertise and commitment to discharge its responsibilities and duties.

Ensuring timely flow of information to the Board and its Committees to enable them to discharge their functions effectively.

Independent verification and safeguarding integrity of the Company’s financial reporting. A sound system of risk management and internal control. Timely and balanced disclosure of all material information concerning the Company to all

stakeholders. Transparency and accountability. Compliance with all the applicable rules and regulations. Fair and equitable treatment of all its stakeholders including employees, customers,

shareholders and investors.

ANALYSIS AND DISCUSSION OF THE FINDINGS

Good governance practices stem from the culture and mindset of the organization. As shareholders across the globe evince keen interest in the practices and performance of companies, CG has emerged on the centre-stage. At RIL, CG is based on the principles of integrity, fairness, equity, transparency, accountability and commitment to values. Over the years, governance processes and systems have been strengthened. In addition to complying with the statutory requirements, effective governance systems and practices inter-alia towards transparency, disclosures, internal controls and promotion of ethics at work-

41



place have been institutionalized. The Company recognizes that good CG is a continuing exercise and reiterates its commitment to pursue highest standards of CG in the overall interest of all stakeholders. For implementing the CG practices, RIL has a well-defined framework. These policies and their effective implementation underpin the commitment of the Company to uphold highest principles of CG consistent with the company’s goal to enhance shareholder value. With expert assistance from Indian and international firms, the Company had initiated a program to review its policies and practices of CG with a clear goal, not merely to comply with statutory requirements in letter and spirit, but also to implement the best international practices of CG, in the overall interest of all the stakeholders. The analysis of this Company is made in two parts: (I) Shareholding pattern, and (II) Key governance parameters and their compliance status.

Shareholding Pattern: The Company was funded by late Shri Dhirubhai Ambani, and Shri Mukesh Ambani is the promoter of the company. It may be noted here that 90.28% of the Company’s shareholders are geographically concentrated in Mumbai region. A snapshot of the shareholding pattern of RIL for the year 2006-2007 is shown in Table-1.

Table-1: Shareholding Pattern of RIL for the year 2006-2007

S.No Name of the Shareholder(s) No. of shares

% of Total Shareholding

1 Promoter & Promoter Group 710370687 50.98 2 Mutual Funds and UTI 34520821 2.48 3 Banks, FI’s and Insurance companies 76551933 5.50 4 Foreign Institutional Investor’s 271623991 19.49 5 Private Corporate Bodies 59562329 4.27 6 Indian Public 179375149 12.87 7 NRI’s and Overseas Corporate Bodies 11566390 0.83 8 Depository under GDR facility 49936741 3.58 Grand Total 1393508041 100

Source: Reliance Industries Limited, Annual Report: 2006-2007, page 60. The following observations can be made from Table-1:

It is evident from Table-1 that the ownership system is concentrated mostly in the hands of family controlled business group of RIL. This is a common feature of the ownership system in most of the Indian corporate business houses. However, RIL is no exception to this system. Around 51% of the equity shareholding of RIL is owned by the Ambani family members themselves.

The management and control of operations of RIL is delegated to the team of professional managers, under the overall governance of the board, which is also primarily controlled by this family.

Foreign institutional investors (FIIs) have substantial shareholdings in RIL. About 20% of the total shares are held by them.

The shareholdings of small, individual and retail Indian investors in RIL are negligible, which is around 13%.

Key Governance Parameters and Their Compliance Status: We now examine the “Report on Corporate Governance” of RIL and ascertain the factual position with respect to the following key governance parameters:

Statement of Company’s Philosophy on Code of Governance: As discussed in the Report of Corporate Governance, “RIL’s philosophy on CG envisages attainment of the highest level of transparency, accountability and equity in all facets of its operations, and in all its interactions with its stakeholders, including shareholders, employees, lenders and the Government. RIL is committed to

42



achieve and maintain the highest international standards of CG and enhance overall shareholders’ value on a sustained basis.” In nutshell, RIL has a well-defined policy framework consisting of: (a) values and commitments policy, (b) code of ethics, (c) business policies, (d) policy for prohibition of insider trading, and (e) program of ethics management. The section dealing with CG initiatives covers issues like insider trading code, followed by code of conduct for directors or senior management personnel, whistle-blower policy, CG rating, and succession planning.

Board of Directors/Board Issues: The board of directors acts as one of the most important CG mechanism in aligning the interests of managers and shareholders (Sarkar, 2009). The important functions of the board are to define a company’s purpose, to strategize and draw up plans to achieve that purpose, to appoint the chief executive, to monitor and assess the performance of the executive team, and to assess their own performance.

It is policy of RIL to maintain an optimum combination of Executive Directors (ED) and Non-Executive Directors (NED). However, all the Independent Directors of the company are required to furnish a declaration at the time of their appointment (as also annually) that they qualify the tests of independence, as laid down under Clause 49.

The Company has disclosed the responsibilities or functions of the board followed by retirement age or tenure of directors’, date of appointment of directors, relationship with other directors, appointment of lead independent director and shareholdings of the directors. We examine various aspects of the board of directors, viz., board structure, board strength and size, directors’ attendance and a few others. The board structure, strength and size of RIL are shown in Table-2.

Table-2: Board Structure, Strength and Size of RIL for the Year 2006-2007

Particulars RIL Total Number of Directors 12 (a) No. of Executive Directors (EDs) (i) Promoters 1 (C) (ii) Others 3 (b) No. of Non-Executive Directors (NEDs) (i) Promoters -- (ii) Independent (IDs) 6 (iii) Nominee -- (iv) Others 2 2. Total Number and Percentage of Directors (i) Executive Directors (EDs) 4 (33%) (ii) Non-Executive Directors (NEDs) 8 (67%) (iii) Independent Directors (IDs) 6 (50%)

Note: (C) denotes executive chairman/chairman-cum-managing director. Source: Extracted from RIL’s Annual Report: 2005-2006, pp. 43-47.

The following observations can be made from Table-2:

RIL has an optimum combination of executive directors (EDs), non-executive directors (NEDs), and independent directors (IDs) on its board during the year 2006-2007, thereby complying with the conditions of Claude 49 1 (A) (i) and (ii) of the Listing Agreement.

According to the “Report on Corporate Governance,” RIL has seven independent directors, out of the total strength of 12 board members. Since one of the seven independent directors is a senior partner of a Solicitors’ and Advocates’ Firm appointed by RIL, he appears to be disqualified as an independent directors, as per clause 49 I (A) (iii) (a) and (d) (ii) of SEBI Listing Agreement. Therefore, the total number of independent directors has been considered as six instead of seven, and the total number of other NEDs has been considered as two instead of one.

43



Directors’ Attendance in Board Meetings: At RIL, nine Board meetings were held during the year 2006-2007, as against the minimum requirement of four meetings. The company has held at least one Board meeting in every three months, and the maximum time gap between any such two meetings was not more than three months. The Directors’ attendance in the board meetings of the RIL for the year 2006-2007 is shown in Table-3.

Table-3: Directors’ Attendance in the Board Meetings of RIL in the Year 2006-2007

Number of Board Meetings Attended Number of Directors Present 7 1 8 3

9* 8 (C+1) Last Annual General Meeting (AGM) Attended 12

Note: * indicates the total number of board meetings held in RIL; and (C+) indicates the attendance of chairman including other directors in board meetings.

Source: Reliance Industries Limited, Annual Report: 2006-2007, page 50. The following observations can be made from Table-3:

The board of RIL met nine times in the year 2006-2007, out of which the full-board met five times.

The RIL’s statistics showing directors’ attendance in the board meetings during the year 2006-2007, as well as, their attendance in the last annual general meeting (AGM) are encouraging. Eight out of the 12 directors (including CMD) attended all nine board meetings. However, all the directors attended the last AGM of RIL. This clearly goes to exhibit “good accountability and commitment of the board members towards the stakeholders of the company.”

Chairman and CEO Duality: Concentration of decision-making power resulting from role duality could impair the board’s oversight and governance roles, including disclosure policies. Separation of the two roles provides the essential checks and balances on management behavior (Blackburn, 1994), as recommended in the revised Combined Code (2006), (Haniffa and Cooke, 2002)

Similarly, Kamesam (2006) observes: “A good CG principle expects that there should be a clear division of responsibilities at the helm of the company, which should ensure a balance of power and authority, such that no one individual has unfettered powers of decision.” However, the decision to combine the posts of chairman and CEO/MD in one person should be publicly justified.

It is observed that this principle has not been accepted and followed by the RIL as the power, authority, and responsibility at the helm in RIL are all vested in one individual only, i.e., chairman and managing director. Furthermore, RIL is not publicly justifying the decision to combine the posts of chairman and CEO/MD.

Disclosure of Tenure and Age Limit of Directors: The code of best practice demands that “independent directors may have a limited tenure, say, not exceeding in aggregate a period of nine years on the board of a company.” Although, the age-limit for directors to retire may be decided by the respective companies, the corporate boards should have an adequate mechanism of self-renewal, as part of the CG best practice. The companies should fix up the retirement age for directors, say, up to a maximum of 70 years.

From this perspective, we have observed that RIL did not disclose its policy on age of retirement as also the age-limit and tenure of service of its non-executive directors. The tenure of office of the executive directors, however, is for contractual period of five years, but there is no age limit for their retirement.

It is further observed from the “Corporate Governance Report” that out of the 12 board members, four are in the age bracket of 30-50 years, one in the age bracket of 51-60 years, one in the age bracket of 60-70

44



years, five in the age bracket of 71-80 years, and one in the age bracket of 81 years and above. Therefore, it may be concluded that half of the RIL board members are more than 70 years.

Disclosure of Definition of Independent Directors, Financial Experts and Selection Criteria for Board Members including Independent Directors: Generally, outside directors in general and, independent directors in particular, should be more effective monitors than are insiders whose interests may be at odds with outside shareholders. Independent directors have the incentive to promote the interests of shareholders and be effective monitors, in order to protect their reputational capital and being sued by shareholders (Sarkar, 2009)

A good governance system demands that a company should disclose in its annual report, the definition

of independent director, financial expert, as also the selection criteria for board members, followed by the corporate board. It is observed that RIL has not followed this principle and hence, the company has not disclosed any information in this regard in its “Report on Corporate Governance”.

Post-Board Meeting Follow-Up System and Compliance of the Board Procedure: It is observed that RIL has disclosed information about post-board meeting follow-up system and its compliance in its report (page 49).

Appointment of Lead Independent Director: Lead independent director is a person who works as a spokesman on behalf of other independent directors on the board. “He works as a link between management and other board members” (Sharma and Singh, 2009).

The international standard of CG prescribes, as a good governance practice, that irrespective of whether the posts of chairman and CEO are held by different persons or by the same individual, there should be a strong and independent non-executive element on the board as lead independent director (other than the chairman), to whom concerns can be conveyed. It will be the responsibility of the lead independent director to act as a spokesperson for independent directors as a group, work closely with the chairman/CEO, and take a lead role in the board evaluation process, apart from other important board functions. The lead independent director should be identified in the annual report.

After a careful examination of the contents in this regard, we have noticed that RIL has appointed a lead independent director, and also disclosed the required information in the “Report on Corporate Governance”. However, we personally feel that the RIL should consider designating another independent board member for this post since the present incumbent appears to be a non-independent, non-executive director.

Disclosure of Other Provisions as to the Boards and Committees: RIL has disclosed all the required information about the directorships in other companies and also provided details of committee membership and committee chairmanship.

Disclosure of Remuneration Policy and Remuneration of Directors: Clause 49 of the Listing Agreement requires the listed Indian firms “to establish and disclose a formal and transparent policy on executive remuneration and for fixing remuneration packages of individual directors based on the principles of fairness, reasonableness and accountability. There should be a clear relationship between responsibility and performance vis-à-vis remuneration.”

Unfortunately, the RIL has not disclosed clearly its remuneration policy in its “Report on CG”. So far as disclosure of remuneration of directors is concerned, RIL has not disclosed the details of remuneration as per fixed component and performance linked incentives, details of perks and allowances of individual executive directors.

Code of Conduct Including Information and Affirmation of Compliance: Clause 49 I (D) of the Listing Agreement stipulate that “it shall be obligatory for the board of a company to lay down a code of

45



conduct for all its board members and senior management,” states Verma and Gupta (2004). All board members and senior management personnel (i.e., core management team comprising all members of management one level below the executive directors including all functional heads) need to affirm compliance with the code on an annual basis. The report of the company needs to contain a declaration to this effect signed by the CEO.

The CG Report reveals that “RIL has furnished information and affirmation of compliance of the code

of business conduct.” However, the present format of declaration to the shareholders, as disclosed in the report, deserves improvement that needs the addressees’ name, signature of CEO and date of the declaration.

Statutory Board Committees

Audit Committee: In India, audit committees are obligatory for all listed entities. “Primary functions of the audit committee are most frequently related to the area of internal controls and risk management, financial reporting, compliance with legal regulations and the relevant fields and issues related to external and internal audit processes.” (Boris et al.) Effective audit committees should improve internal control and act as a means of attenuating agency costs (Ho and Wong, 2001), and as a powerful monitoring device for improving value-relevant CG disclosure and more reliable financial reporting (Jing Li et. al., 2008).

The RIL board has constituted Audit committee, comprising three Independent, Non-Executive Directors, namely, Shri Yogendra P. Trivedi, Chairman, Shri S. Venkitaramanan, Vice Chairman, and Shri Mahesh P. Modi. All the members of the Audit Committee possess financial accounting expertises. The composition of the committee meets the requirements of Companies Act, 1956 and Clause 49. Five Committee meetings were held during the year, as against the minimum requirement of four meetings. The status of the audit committee in RIL in the year 2006-2007 is presented in Table-4.

Table-4: Status of Audit Committee in RIL in the Year 2006-2007

S.No Particulars Status

1. Transparency in composition of audit committee

Committee consists of three NED/Independent Directors, chairman being independent.

2. Compliance of minimum requirement of the number of independent directors in the committee.

All members are independent directors as required by the Clause 49 of the Listing Agreement.

3. Compliance of minimum requirement of the number of meetings of the committee.

Five meetings held during 2006-2007. All three members attended all five meetings.

4. Information about literacy and financial expertise of the committee members.

All members reported having adequate literacy and expertise in finance and accounting.

5.

Information about participation of finance, statutory auditors, chief internal auditors, and other invitees in the committee meetings.

Executives of Accounts, Finance, Secretarial departments, Management Audit Cell, and representatives of statutory internal auditors, cost auditors attended the meetings.

6. Disclosure of audit committee charter and terms of reference.

Audit committee charter/terms of reference disclosed in corporate governance report.

7. Publishing of audit committee report. Not published in corporate governance report. Source: RIL Annual Report, 2006-2007, pp. 50-51. The following observations can be made from Table-4:

RIL has complied with the conditions of the Clause 49 of the Listing Agreement in regard to items 1, 2, 3, 4 and 6 mentioned in Table-4.

46



No disclosure has been made regarding participation of head of finance, and head of internal audit in the audit committee meetings.

RIL has not published audit committee report in the Report on Corporate Governance.

Shareholders’/Investors’ Grievance Committee: The Board has constituted a five-member Shareholders/Investors’ Grievance committee. During the year, the committee met three times. Shri Vinod Ambani was appointed as the Compliance Officer for complying with the requirements of SEBI Regulations and the Listing Agreements with the Stock Exchanges in India. The total number of complaints received and resolved to the satisfaction of investors were 8080 during the year 2006-2007. However, 286 requests for transfers and 1172 requests for dematerialization were pending for approval as on March 31, 2007. The status of shareholders’/investors’ grievance committee in RIL in the year 2006-2007 is shown in Table-5.

Table-5: Status of Shareholders’/Investors’ Grievance Committee in RIL in the Year 2006-2007 S. No.

Particulars Status

1. Transparency in the composition of the committee

Committee consists of five directors, of whom three are executive directors, one independent director, and one non-executive non-independent director, chairman being non-executive.

2. Information about nature of complaint and queries received and disposed—item wise.

Item-wise break-up of the nature of queries/complaints disclosed. No complaints pending reported.

3. Information about number of committee meetings and attendance of committee members.

Three meetings held during the year. Four members attended all three meetings and one member attended two meetings.

4. Information about investor/shareholder survey conducted.

Shareholders feedback survey conducted and disclosed in the CG Report.

5. Publishing of committee report. Not published in CG Report. Source: Compiled from RIL’s Annual Report: 2006-2007, page 55. The following observations can be made from Table-5: • RIL has complied with all the requirements of Clause 49 of the Listing Agreement in regard to

items 1 and 2 mentioned in Table-5. • It has also given adequate information in regard to the items 3 and 4 mentioned in Table-5 above. • However, RIL has not published the shareholders’/investors’ grievance committee report in its

Corporate Governance Report.

Non-Mandatory Board Committees

Remuneration Committee: The Board has constituted a four member remuneration committee, under the Chairmanship of Shri Mansingh L. Bhakra. The committee has been constituted to recommend/review remuneration of the Managing Director and Whole-time Directors, based on their performance and defined assessment criteria. However, there was no meeting of the committee during the year, as no revision in remuneration was considered. Table-6 depicts the status of the remuneration committee in RIL for the year 2006-2007.

47



Table-6: Status of Remuneration Committee in RIL in the Year 2006-2007 S.

No. Particulars Status

1. Transparency information of the committee

Committee consists of four directors, of whom three are independent directors, and one non-executive non-independent director.

2. Information about number of committee meetings

No meeting held during 2006-2007.

3. Compliance of minimum requirements of the number of NEDs in the committee.

Committee consists of all NEDs/Independent directors, complying with minimum requirement of Clause 49 of the Listing Agreement.

4. Compliance of the provision of independent director as chairman of the committee.

Chairman of the committee is a non-executive non-independent director, resulting in non-compliance of Clause 49 of the Listing Agreement.

5. Information about participation of all members in the committee meeting.

Did not arise, as no meeting held during the year.

6. Publishing of committee report. Not published in CG Report. Source: Compiled from RIL’s Annual Report: 2006-2007, page 54. The following observations can be made from Table-6:

Formation of the remuneration committee in a listed company is a non-mandatory requirement of the Clause 49 of the Listing Agreement. Despite that, however, RIL has set up a remuneration committee following the conditions of Clause 49 of the Listing Agreement mentioned in items 1 and 3 in Table-6.

The chairman of the committee is a non-executive non-independent director, although RIL has disclosed the status of the chairman of the committee as independent director which is a requirement of Clause 49.

As reported in the Report on CG, RIL did not hold any meeting during the year 2006-2007 and therefore, the requirement of participation of all the committee members, as per Clause 49, did not arise.

However, RIL has not published any report of the remuneration committee, due to the reason explained above, in its Report on CG.

Other Board Committees RIL did set up the following board committees in order to look into the important aspects of corporate governance: (a) Corporate Governance and Stakeholders’ Interface (CGSI) Committee, (b) Employees Stock Compensation (ESC) Committee, (c) Finance Committee, (d) Health, Safety, and Environment (HS&E) Committee, and (e) Functional Committee. It is worth mentioning here that although no formal nomination committee has been formed by RIL, however, the related activities pertaining to ‘nomination’ has been assigned to Corporate Governance and Stakeholders’ Interface Committee.

THE REPORT ON CORPORATE GOVERNANCE DISCLOSURE

Disclosures in the Report of Corporate Governance in the annual report of RIL, as required by the Clause 49 of the Listing Agreement, have been sub-divided into two parts: (1) Statutory requirements disclosures, and (2) Non-mandatory requirements disclosures.

Statutory Requirements Disclosures: The Company has complied with all the mandatory requirements of Clause 49. Some of the most important items of disclosures/requirements and their status of compliance in RIL are outlined in Table-7.

48



Table-7: Items of Statutory Disclosures/Requirements and Their Status of Compliance in RIL in the Year 2006-2007

S.No Items of Statutory Disclosures Status

1. Significant related-party transactions having potential conflict with the interests of the company.

Disclosed as not being in conflict with the interests of the company. All such transactions negotiated on arms length for the interest of the company.

2. Non-compliance related to capital market matters during the last three years.

No non-compliance reported.

3. Accounting treatment Disclosed departure in accounting treatment in regard to the scheme of amalgamation of IPCL with RIL.

4. Board disclosure—Risk Management Laid down procedure to inform board members about risk assessment and minimization procedure for board’s review not reported.

5. Management Discussion and Analysis Management discussion and analysis report included in the annual report.

6.

Shareholders information on: (i) Appointment of new director/re-

appointment of retiring directors. (ii) Quarterly results and presentation (iii) Share transfers (iv)Directors’ responsibility statement.

Disclosed all compliance.

Source: Compiled from RIL’s Annual Report 2006-2007, page 66.

Non-Mandatory Requirements/Disclosures: The Company has complied with some of the important non-mandatory requirements stipulated under Clause 49. The Company has a whistle-blower policy and enforcement mechanism. Important items of non-mandatory requirements/disclosures and their status of compliance in RIL are depicted in Table-8.

Table-8: Items of Non-Mandatory Disclosures/Requirements and Their Status of Compliance in RIL

in the Year 2006-2007 S. No

Items of Non-Mandatory Disclosures Status

1. Remuneration committee Disclosed compliance 2. Shareholder rights (e.g., information and half-yearly

declaration of financial performance sent to shareholders) Disclosed compliance

3. Audit qualification Disclosed compliance 4. Training of board members Disclosed compliance 5. Evaluation mechanism of non-executive directors As disclosed, evaluation

mechanism not developed 6. Whistle-blower policy Disclosed compliance Source: RIL Annual Report 2006-2007, page 66.

General Body Meetings: In regard to reporting of information on a company’s general body meetings, following information need to be mandatorily included in the annual report: (a) location and timing of general meetings held in last three years, (b) details of special resolution passed in the last three AGMs/EGMs, and (c) details of resolution passed during the previous year through postal ballot including the name of the conducting official and voting pattern/procedure. We have carefully observed that RIL has provided the required information, on all the above items, in the Corporate Governance Report of 2006-2007.

Means of Communication and General Shareholder Information: RIL provided general shareholder information and adopted various means of communication (half-yearly reports, quarterly results, news

49



releases, presentations, website, annual report, SEBI EDIFAR, etc.) every year, as prescribed by the Listing Agreement, to be included in the Report on Corporate Governance.

CEO and CFO Certification: Clause 49 of the Listing Agreement has mandated the CEO and CFO certification to the board of directors of a listed company, on certain specific matters, and disclosure of the same in the Corporate Governance Report. The Chairman and MD and the CFO of the company give certification on financial reporting and internal controls to the Board in terms of Clause 49. RIL has disclosed that it has complied with these requirements. But unfortunately it has not published the certificate in the Corporate Governance Report.

Compliance of Corporate Governance and Auditors’ Certificate: It is observed that RIL obtained an “unqualified” certificate from company statutory auditors (M/s. Chaturvedi & Shah, M/s. Deloittie & Sells, and M/s. Rajendra & Co.) confirming that the company has complied with the conditions of Clause 49 of the Listing Agreement. This certificate was also forwarded to the Stock Exchanges where the securities of the company are listed. Details about the fees paid to the statutory auditors were also given.

In this connection, it may be clearly stated that RIL does not appear to have sufficient ground for obtaining a clean certificate, as there are some glaring instances of non-compliance of certain important conditions of CG. The areas of non-compliance have been specified in the forthcoming section titled as “Analysis of Results and Suggestions for Improvement”.

The company has voluntarily appointed a practicing company secretary to conduct “Secretarial Audit” of the company for 2006-2007, who has submitted his report confirming the compliance with all the applicable provisions of various corporate laws. However, the ‘Secretarial Audit Report’ was given in the annexure of Report of CG.

Disclosure of Stakeholders’ Interests: Here, we focus briefly on the disclosure made by the RIL in its annual report on various initiatives and measures taken by the company on the following items, in order to meet its commitments on the expectations and interests of stakeholders: (a) Environment, Health and Safety measures (EHS); (b) Human Resources Development (HRD); (c) Corporate Social Responsibility (CSR); and (d) Industrial Relations (IR). We have observed that RIL in its annual report of 2006-2007 has explained in detail various initiatives and measures taken by the company on EHS, HRD, CSR and IR issues during the year. We personally feel that RIL should have disclosed its policies separately and clearly in regard to all these items.

EVALUATION OF CG STANDARDS AT RELIANCE INDIA LIMITED

At RIL, CG is based on the principles of integrity, fairness, equity, transparency, accountability and commitment to values. In addition to complying with the statutory requirements, effective governance systems and practices inter-alia towards transparency, disclosures, internal controls and promotion of ethics at work-place have been institutionalized. The Company recognizes that good CG is a continuing exercise and reiterates its commitment to pursue highest standards of CG in the overall interest of all stakeholders. With expert assistance from Indian and international firms, the Company had initiated a program to review its policies and practices of CG with a clear goal, not merely to comply with statutory requirements in letter and spirit, but also to implement the best international practices of CG, in the overall interest of all the stakeholders.

In order to study the CG practices of the RIL, the CG section of the Annual Report has been analyzed. After an in-depth examination and analysis of the governance structures, processes and disclosures made in the Corporate Governance Report, the next question arises as to what is the standard and quality of governance that has been achieved by the RIL?

50



No doubt, there have been some genuine difficulties while conducting this study: non-availability of inside information, and no scope for discussion with key officials of the company, its auditors, directors and major shareholders. As an alternative, we have developed our own model as a ‘working method’. The method applied here for evaluation of the standard and quality of CG practiced in RIL has considered all the relevant conditions of corporate governance, as stipulated by the Clause 49 of the Listing Agreement, and provisions of the Companies Act, 1956. In order to ascertain how far this company is compliant of governance standard, a point value system has been applied, whereby adequate weight-age in terms of points has been provided to these conditions, according to their importance. Accordingly, RIL has been awarded points on “key parameters,” which constitute the governance process in the company. These key governance parameters and the criterion for evaluation of governance standard have been selected on a hindered-point scale as shown in Table-9.

Table-9: Criterion for Evaluation of Governance Standard for the Year 2006-2007

Governance Parameters Points Scored

Max. Points

1. Statement of Company’s Philosophy on Code of Governance 2 2 2. Board Composition and Strength of the Board 2 2 3. Chairman and CEO Duality

(i) Promoter executive chairman-cum-MD/CEO (ii) Non-promoter executive chairman-cum-MD/CEO (iii) Promoter non-executive chairman (iv) Non-promoter non-executive chairman (v) Non-executive independent chairman

1 2 3 4 5

5 (Max)

4. Disclosure of Tenure and Age Limit of Directors -- 2 5. Disclosure of:

(i) Definition of independent director (ii) Definition of financial expert (iii) Selection criteria of board of directors including independent

directors

1 1 1

3

6. Post-board Meeting, Follow-up System and Compliance of the Board Procedure

2

7. Appointment of Lead Independent Director 2 8. Disclosure of Other Provisions as to the Boards and Committees 1 9. Disclosures of:

(i) Remuneration policy (ii) Remuneration of directors

1 1

2 10. Code of Conduct:

(i) Information on code of conduct (ii) Affirmation of compliance

1 1

2 11. Board Committees

A. Audit Committee: (i) Transparency in composition of audit committee (ii) Compliance of minimum requirement of the number of

independent directors in the committee (iii) Compliance of minimum requirement of the number of meetings

of the committee (iv) Information about literacy and expertise of committee members (v) Information about participation of head of finance, statutory

auditor and chief internal auditor in the committee meeting (vi) Disclosure of audit committee charter and terms of reference (vii) Publishing of audit committee report

1 1

1

1 1

2 1

8 B.Remuneration/compensation committee:

(i) Formation of the committee

1

51



(ii) Information about number of committee meetings (iii) Compliance of minimum requirements of the number of non-

executive directors in the committee (iv) Compliance of the provision of independent director as chairman

of the committee (v) Information about participation of all members in the committee

meetings (vi) Publishing of committee report

1 1

1

1

1

6 C. Shareholders’/Investors grievance committee:

(i) Transparency in composition of the committee (ii) Information about nature of complaints and queries received and

disposed—item wise (iii) Information about number of committee meetings (iv) Information about investors/shareholders survey conducted (v) Publishing of committee report

1 1

1 1 1

5 D. Nomination committee:

(i) Formation of the committee (ii) Publishing of committee charter and report (E) Health, Safety and environment committee (F) Ethics and compliance committee (G) Investment committee (H) Share transfer committee

1 1

2

1 1 1 1

12. Disclosures and Transparency: (a) Significant related party transactions having potential conflicts

with the interest of the company (b) Non-compliance related to capital market matters during last

three years (c) Accounting treatment

(d) Board disclosure—Risk Management (i) Information to the board on risk management (ii) Publishing of risk management report (e) Management discussion and analysis (f) Shareholders’ information: (i) Appointment of new director/re-appointment of retiring directors (ii) Quarterly results and presentation (iii) Share transfers (iv) Directors responsibility statement (g) Shareholder rights (h) Audit qualification (i) Training of board members (j) Evaluation of non-executive directors (k) Whistle-blower policy

2

2

2

2 1 2

1

1 1 1 2 2 2 2 2

25 13. General Body Meetings:

(i) Location and time of general meetings held in last three years (ii) Details of special resolution passed in the last three AGMs/EGMs (iii) Details of resolution passed last year through postal ballot

including the name of conducting official and voting procedure

1 1

1

3 14. Means of Communication, and General Shareholder Information 2 15. CEO/CFO Certification 2 16. Compliance of Corporate Governance and Auditors’ Certificate:

(i) Clean certificate from Auditors, or

10 10

(Max)

52



(ii) Qualified certificate from auditors

5

17. Disclosure of Stakeholders’ Interests: (i) Environment, Health and Safety measures (EHS) (ii) Human resource development (HRD) initiative (iii) Corporate social responsibility (CSR) (iv) Industrial relations (IR) (v) Disclosure of policies on EHS, HRD, CSR and IR

2 2 2 2 2

10

Total 85 100

After determining the total score based on these parameters, RIL and industry have been evaluated on a five-point scale as shown in Table-10.

Table-10: Grading on Five-Point Scale

Score Range Rank 86-100 Excellent 71-85 Very Good 56-70 Good 41-55 Average

Below 41 Poor

ANALYSIS OF RESULTS AND SUGGESTIONS FOR IMPROVEMENT

An evaluation of the results reveals that the Company has shown “very good” performance with a score of 85 points. It also reveals that RIL in particular, and the textile, synthetics and petrochemical industry in general, have exhibited “very good” performance in maintaining the standards and attaining the quality of governance practices.

The concept of CG has emerged as a result of shifting of objective of the corporation from ‘profit’ maximization to ‘value’ maximization, through transparent, fair, efficient and effective policies of the organization. From the above micro analysis and study of the Annual Report of the Company for the year 2006-2007, it appears that there is still scope for improvement in the level of corporate governance standards and quality of disclosures to be practiced in the company. The specific areas where the Company needs to pay special attention are as follows:

Disclosure of the power and responsibility at the helm of affairs of the company, to recognize

the principle of chairman and CEO duality, as well as, public justification for combining the post of chairman and CEO/MD in one person in the company.

Disclosure of tenure and age-limit of all executive, non-executive, as well as, independent directors.

Disclosure of the “definition” of independent director, financial expert, and disclosure of selection criterion for non-executive and independent directors.

Proper appointment of Lead Independent Director in the board, in strict compliance with the provisions of Clause 49 I (A) (iii) (a) and (d) (ii) of SEBI Listing Agreement.

Disclosure of “break-up” of remuneration policy, as well as, providing information about the detailed “break-up of salary”—fixed component, performance-linked-incentives, perks and allowances, etc., of each executive director separately.

Affirmation of Compliance of Code of Conduct, and declaration to the shareholders in a proper and acceptable ‘format’.

Disclosure of the reports of Audit Committee, Remuneration Committee and Shareholders’/Investors Grievance Committee in the “Corporate Governance Report.”

53



Constitution of “separate board committees” for effective governance of the company’s affairs, e.g., Ethics Committee, Nomination Committee, Investment Committee, etc., and disclosure of the reports of these committees in the Annual Reports.

Disclosure of information to the Board on “risk management” and publishing of a comprehensive report on risk management—risk assessment and risk minimization procedures envisaged and adopted by the company, in the annual report for stakeholders’ information and review.

Disclosure of mechanism of evaluation of non-executive directors’ performance in the company.

Disclosure and publishing of “CEO and CFO Certificate” in the Report on Corporate Governance.

Disclosure of the Company’s policy on EHS, HRD, CSR and IR issues. Any other voluntary disclosures.

CONCLUSION

In fact, India has the largest number of listed companies in the world, and the efficiency and well-being of the financial markets is critical for the economy in particular, and the society as a whole. It is imperative to design and implement a dynamic mechanism of CG, which protects the interests of relevant stakeholders without hindering the growth of enterprises. Let us hope, once the government and the regulators establish an efficient and effective regulatory framework for corporations to function in, the market would push these corporations to raise the bar constantly.

Undoubtedly, there have been several CG initiatives launched in India: first was by CII with the “first” Voluntary Code of CG in 1998; second was by SEBI Clause 49 of the listing agreement; third was the Chandra Committee; and fourth was by SEBI—Murthy Committee in 2002. Based on some of their recommendations, SEBI revised Clause 49 in August 2003. The SEBI envisages that all CG norms will be enforced through listing agreements between Companies and the Stock Exchanges. With the SEBI guidelines demanding the listed Indian companies to adopt and follow CG norms, otherwise face delisting action, it became necessary for every organization to ensure higher shareholder and stakeholder values. However, a little reflection suggests that “for companies with little-floating stock (which account for more than 85% of the listed companies) delisting because of non-compliance is hardly a credible threat.” The SEBI can, of course, counter that by stating that the “reputation effect of delisting can induce compliance and, hence, better CG.” Experts point out that in India companies (such as, HDFC and BHEL) tend to get a better valuation than their peers as do professionally-run companies (like Hindustan Unilever, ITC and Infosys) not just due to their performance, but also due to their adherence to CG norms.

Reliance Industries Limited (RIL) is one of the most well-known Indian business groups, which emphasizes a lot on shareholder values. Reliance brand has stood for its trust and confidence for the past several decades. The Company is India’s ‘largest’ private-sector Company on all major financial parameters with a turnover of Rs. 139,269 crore (USD 34.71 billion), cash profit of Rs. 25,205 crore (USD 6.3 billion), net profit of Rs. 15,261 crore (USD 3.8 billion), and net worth of Rs. 81,449 crore (USD 20.3 billion), as of March 31, 2008. Moreover, Reliance is the first private company from India to feature in the “Fortune Global 500” list of ‘World’s Largest Corporations’ and ranked 103rd amongst the world’s Top 200 companies in terms of profits.

Board of Directors must apply the tests of fairness, accountability, responsibility and transparency to all actions, be accountable to the company, and also responsible towards the company’s identified stakeholders. The foundation of any structure of CG is disclosure. The correct balance between conformance with governance principles, compliance with disclosure legislation and performance in an entrepreneurial market economy must be found, but this will be ‘specific’ to each company. Undoubtedly, at Reliance, CG is based on the principles of integrity, fairness, equity, transparency, accountability and

54



commitment to values. Over the years, governance processes and systems have been considerably strengthened. In addition to complying with the statutory requirements, effective governance systems and practices inter-alia towards transparency, disclosures, internal controls and promotion of ethics at work-place have been institutionalized. The Company recognizes that good CG is a continuing exercise and reiterates its commitment to pursue highest standards of CG in the overall interest of all the stakeholders. For implementing the CG practices, the Company has a well-defined policy framework, and their effective implementation underpin the commitment of the company to uphold highest principles of CG consistent with the company’s goal to enhance shareholders value. This paper explores the CG practices of the Reliance Group using exploratory method of case study. Some of the major initiatives undertaken by the Company towards strengthening its CG systems and processes include the following:

Constitution of CG and Stakeholders’ Interface Committee Nomination Committee Adoption of CG Manual Secretarial Audit Guidelines for the Board/Committee Meetings Implementation of the best globally prevalent CG practices Role of the Company Secretary in Overall CG Process Observance of the Secretarial Standards issued by the ICSI.

In fact, we are duly aware about some of the limitations of our study viz., non-availability of inside information, and no scope for discussion with the key officials of the company (such as, its auditors, directors and major shareholders, etc.). Accordingly, in the present exploratory case study of RIL, we had developed our own model as a “working method”. The method applied here for evaluation of the standard and quality of CG practiced in this Company had considered all the relevant conditions of CG, as stipulated by Clause 49 of the Listing Agreement and provisions of the Companies Act, 1956. In order to ascertain how far this company is compliant of CG standard, a “point-value-system” had been applied, as already shown above in Table-9.

In spite of some limitations, this case study will help us to pinpoint the effectiveness of CG practices followed by the Reliance group. Based on the disclosures made by the Company in its “Report on CG” for the year 2006-2007, and an in-depth evaluation of the results reveals that this company has shown “very good” performance, with an overall score of 85 points (see Table-10 for details). Furthermore, this study highlights that Reliance group in particular (and the textile, synthetics and petrochemical industry in general) have exhibited “very good” performance in maintaining the CG standards and attaining the quality of governance practices. “The enterprise should disclose awards or accolades for its good CG practices, especially where such awards or recognition come from major rating agencies, stock exchanges or other significant financial institutions, disclosure would prove useful since it provides independent evidence of the state of a company’s CG,” (OECD, 2006). It is worth mentioning here, Reliance group won “the Golden Peacock Global Award for Excellence in Corporate Governance” for the year 2008. This award for CG was instituted with the support of the World Council for CG in 2001, to foster competitiveness among the businesses to improve the quality of CG. RIL are a stalwart, and the exemplary performance of Reliance group in the field of CG, with a strong code of ethics and excellence in performance is worth being appreciated. The Company has already set high standards for CG, which shall be revered, appreciated and followed by the generations to come. In nutshell, this Company is in the forefront of implementation of CG best practices.

From the above ‘micro’ analysis, and study of the Annual Report of Reliance Company for the year 2006-2007, it is apparent that there is still some scope for improvement in the level of CG standards and quality of disclosures to be practiced in the company. It is important to note that many of the areas where the Company needs to improve its CG practices are common to most of the Indian firms. Keeping in view the fact that Reliance group is the largest private-sector firm in India, we are hopeful that its CG disclosure practices will attract a lot of attention, and may act as a good trend-setter in the corporate world. Our

55



survey and feedback from various experts indicates that a majority of BSE Sensex companies in India are perceived to be above average in terms of CG practices. According to William Holstein (2008), “Indian companies are much better governed. India is sort of a noisier version of the U.S. system, which is that you have to be accountable to shareholders and all the other stakeholders. The principles are the same, but the information acquisition is a little bit more problematic in India compared to the U.S… In India, there is a spectrum of companies, such as Infosys, which on some dimensions is better governed than companies in the West in terms of how quickly it discloses things and how quickly it complies with Nasdaq norms.”

REFERENCES

Barako Dulacha G., Hancock Phil and Izan H.Y. (2006), “Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies,” Corporate Governance: An International Review, Volume 14, No.2, pp. 107-125.

Beattie, V. Mclnnes, B., and Fearnley, S. (2002) “Through the Eyes of Management: A Study of Narrative Disclosures,” Institute of Chartered Accountants in England and Wales (ICAEW), Milton Keynes.

Bhasin, Madan (2009) “Corporate Governance and Transparency Scenario in the Asian Countries,” in book “CG : Millennium Challenges,” published by Mishra, R.K. and Jhunjhunwala, Shital (editors), Excel India Publishers, New Delhi, pp. 117-137.

Bhat, Varun, “CG in India: Past, Present and Suggestions for the Future,” Iowa Law Review 2007, pp. 1429-1445.

Blackburn, V. (1994) “The Effectiveness of Corporate Control in the US Corporations,” CG: An International Review, 2, page 196.

Boris, Sanja and Ana () “The Role of Audit Committee in CG,” extended abstract, pp. 19-22. Bushman, R.M. and Smith, A.J. (2003), “Transparency, Financial Accounting Information and CG,”

FRBNY Economic Public Review, April, pp. 65-87. Cadbury Code (1992), “The Report of the Committee on the Financial Aspects of CG: The Code of Best

Practices,” Gee Professional Publishing, London. Cadbury Adrian (2002), “CG and Chairmanship: A Personal View,” Oxford University Press. Chahine S. and Filatochev I. (2008), “The Effects of Information Disclosure and Board Independence on

IPO Discounts,” The Journal of Small Business Management, Vol. 46, No. 2, pp. 219-241. Chakrabarti, R., Megginson, W. and Yadav, P.K. “CG in India,” Journal of Applied Corporate Finance,

Volume 20, No. 1, Winter 2008, pp. 59-72. Collett Peter and Hrasky Sue (2005), “Voluntary Disclosure of CG Practices by Listed Australian

Companies,” Journal of Corporate Governance: An International Review, Volume 13, No.2, pp.188-196.

Combined Code on CG (2006), Financial Reporting Council limited, London. Directors Database, Clause 49 of Listing Agreement, electronically available at

www.directorsdatabase.com/Clause49. Eng, LL and Mak, Y.T (2003) “CG and Voluntary Disclosure,” Journal of Accounting and Public Policy,

22(4), pp. 325-345. FASB (2001) “Improving Business Reporting: Insights into Enhancing Voluntary Disclosure,” Business

Reporting Research Project, Steering Committee Report, Financial Accounting Standards Board. Forker, J.J. (1992) “CG and Disclosure Quality,” Accounting and Business Research, 22 (86), pp. 111-

124. Gupta Anil, Nair Ajit P. and Gogula Ratnaja (2003), “Corporate Governance Reporting by Indian

Companies: A Content Analysis Study,” The ICFAI Journal of Corporate Governance, Volume 2, No. 4, pp. 7-18.

Gupta K. C. (2006), “A Comparative Study of Corporate Governance Practices in Selected Companies of Automobile Industry in Haryana,” Punjab Journal of Business Studies, Volume 1, No. 2, pp. 58-71.

Haniffa, M.R. and Cooke, T.E. (2002) “Culture, CG and Disclosure in Malaysian Corporations,” Abacus, 38(3), pp. 317-349.

56



Healy P. and Palepu K. (2001), “Information Asymmetry, CG Disclosure, and the Capital Markets: A Review of the Empirical Literature,” Journal of Accounting and Economics, Vol. 31, pp. 405-440.

Ho, SSM and Wong, K.S., (2001) “A Study of the Relationship Between CG Structures and the Extent of Voluntary Disclosure,” Journal of International Accounting, Auditing and Taxation, 10(2), pp. 139-156.

Jing Li, Richard Pike and Roszaini Haniffa (2008) “Intellectual Capital Disclosure and CG Structure in UK Firms,” Accounting and Business Research, Vol. 38, No. 2, pp. 137-159.

Kamesam Vepa (2006), “Corporate Best Practices: Recommendations for Directors,” IRDA Journal, March, pp. 26-29.

Klein, A. (2002), “Audit Committee, Board of Director Characteristics and Earnings Management,” Journal of Accounting and Finance, Vol. 33, pp. 375-400.

Murthy N. and Narayan R. (2003), “Report of the SEBI Committee on CG,” Retrieved from <www.sebi.gov.in>.

Mangena, M. and Pike, R. (2005) “The Effect of Audit Committee Shareholding, Financial Expertise and Size on Interim Financial Disclosures,” Accounting and Business Research, 35(4), pp.327-349.

Mitra, G. and Saha, S.S. (2009) “Corporate Governance Disclosure Practices: Do We Proceed towards Global Convergence?” in book “CG : Millennium Challenges,” published by Mishra, R.K. and Jhunjhunwala, Shital (editors), Excel India Publishers, New Delhi, pp. 99-116.

National Foundation for CG (2004) “CG in India: Theory and Practice,” pp. 1-60. William J. Holstein (2008) “CG in India and China,” Business Week, March 6, available online at

<http://www.businessweek.com>. OECD Report (2004), The OECD Principle of Corporate Governance, OECD, Paris. Solomon, Jill and Solomon, Aris (2004), “The Role of Transparency in CG,” CG and Accountability,

John Wiley & Sons, Ltd. pp. 119-143. Patelli, L. and Prencipe, A. (2007) “The Relationship between Voluntary Disclosure and Independent

Directors in the Presence of a Dominant Shareholder,” European Accounting Review, 16(1), pp. 5-33. Patel, Manesh (2006), “Inside Clause 49,” Express Computer, electronically available at

<www.expresscomputeronline.com>, Feb. 27,. Parker, L.D. (2007) “Financial and External Reporting Research: The Broadenning CG Challenge,”

Accounting and Business Research, 37(1), pp. 39-54. Peter Collett and Sue Hrasky (2005) “Voluntary Disclosure of CG Practices by Listed Australian

Companies,” CG: An International Review, Vol. 13, No. 2, March, Blackwell Publishing Limited, pp. 188-196.

Raffournier, B (1995) “Determinants of Voluntary Financial Disclosure by Swiss Listed Companies,” European Accounting Review, 4(2), pp. 261-280.

Reliance Industries Limited, Annual Report 2006-2007 RIL Media Release (2008): “Reliance wins Golden Peacock Global Award” for excellence in CG 2008,

October 8, Media Release. Sarkar, J. “Board Independence and CG in India: Recent Trends and Challenges Ahead,” The Indian

Journal of Industrial Relations, Vol. 44, No. 4, April 2009, pp. 576- . Sen, D.K., “Clause 49 of Listing Agreement on Corporate Governance,” The Chartered Accountant

Journal, December 2004, pp. 806-811. Subramanian S. (2006), “Management Control and Differences in Disclosure Levels: The Indian

Scenario,” The ICFAI Journal of Corporate Governance, Volume 5, No. 1, pp. 16-33. Sharma, Reema and Singh, Fulbag (2009), “Voluntary CG Disclosure: A Study of Selected Companies in

India,” The ICFAI University Journal of CG, Vol. VIII, No. 3 & 4, pp. 91-108. Steve Fong and Winnie Shek (2009), “CG Disclosure and Company Performance of Hong Kong-based

and China-based Family-Controlled Property Development Companies,” The ICFAI Journal of CG, Vol. 8, No. 3&4 July, pp. 7-50.

Sareen, V.K, (2009) “Firm’s Attributes and Corporate Governance Disclosure Practices: An Empirical Investigation,” in book “CG : Millennium Challenges,” published by Mishra, R.K. and Jhunjhunwala, Shital (editors), Excel India Publishers, New Delhi, pp. 117-137.

The ICSI (2008) “Corporate Governance: Modules of Best Practices,” The Institute of Company Secretaries of India, New Delhi, pp. 170-329.

57



United Nations (2006) “Guidance on Good Practices in CG Disclosure,” United Nations Conference on Trade and Development, Geneva, New York and Geneva.

Verma, S.K. and Gupta, Suman (2004), “Corporate Governance and Corporate Law Reform in India,” Institute of Developing Economics—Japan External Trade Organization, Asian Law Series, Paper no. 25.

Voicu D. Dragomir and Maria-Cristina (2009) “CG in the EU: The Impications for Financial and Narrative Reporting,” International Journal of Business and Economics, Vol. 9, No. 1, pp. 53-64.

Whittington, G. (1993) “CG and the Regulation of Financial Reporting,” Accounting and Business Research, 23(91A), pp. 311-319.

58



A study of relationship between Environmental Factors and Project Performance

Ali Shirazi

Associate Professor,

Faculty of Administrative and Economic Sciences, Ferdowsi University of Mashhad,

Iran

ABSTRACT This research aims to identify environmental factors that affect project performance. An extensive literature review and a pilot study found two types environmental factors related to project performance: organizational and project factors, each consists of three elements: structure, leadership and climate. In a survey of professional project managers or those who worked closely in project jobs, project structure, organizational climate and project leadership were identified as the most influential factors in effective delivery of projects. The findings are discussed and suggestions are made to improve the effectiveness of project performance. Key Words:Project performance,organizational factors,project factors,project leadership

INTRODUCTION Notable business and management writers, including Toffler (1970), Bennis (1979), Coulson-Thomas (1990) and Gaddis (1991), suggest that a project is a microcosm of a business environment, which is increasingly marked by change, uncertainty and ambiguity. Today, project organisation and management are widely used not only in traditional project-oriented industries, such as construction and defence, but also in telecommunications, finance, retail and manufacturing. Barnes (1991) and Steingraber (1990) argue that the increasing importance of speed in product development and delivery is compelling more organisations to adopt a project-oriented structure and mode of operation in order to achieve business objectives more efficiently and effectively. Similarly, Graham (1997) suggests that most future growth in organisations will result from successful development projects that generate new products and services.

Therefore, it seems reasonable to suggest that as project management and associated skills become more important in future business success, more attention will have to be paid to its unique organisation and management issues. Thus, information about what makes an individual an effective project manager is necessary to help organisations formulate their human resource strategies more effectively and improve their business performance and competitiveness.

Job performance Organisation performance is the sum of outputs of all organisation members (Boyatzis, 1982; Blumberg and Pringle, 1982; Anderson and Butzin, 1974). This highlights the importance of research into individual’s job performance and the factors affecting it. However, despite the importance of job performance, which Heneman (1986) suggests is the most frequently analysed dependent variable in personnel psychology, attempts to research it in the last thirty years have failed to produce consistent results. The main difficulty is that job performance is situational, complex and unstructured. Another problem has been the ambiguity of terms that are used to describe performance, such as effectiveness, success, efficiency and competency. For example, while most management writers agree that effectiveness is related to accomplishment of organisation goals (Guion and Gottier, 1985; Kast and Rosenweig, 1985),

59



interpretation of what constitute effectiveness and how to measure it differ among writers (Boyatzis, 1982; Roskin, 1975; Reddin, 1974; Campbell et al., 1970).

Performance is expressed as the ratio of output to input. This means that the fewer the resources used to produce the outputs, the higher the performance ratio and, therefore, effectiveness will be. Therefore, for a finite quantity of resources (human, capital and material), the performance depends on the strategy and processes. In other words, it is the effective integration of the leadership role (strategy direction and formulation) and managerial role (resource allocation and process control) that leads to good organisation performance. Performance is, therefore, the result of achieving organisational objectives, which serve as a yardstick for success.

Harper (1984) emphasises that since the performance of any unit in an organisation will be of interest to different people for different purposes, care must be taken to select suitable inputs that will produce the required outputs. Furthermore, it is widely recognised that one of the primary inputs that directly affects the outputs and performance in an organisation is the human input, particularly skills, brought to the job or developed on the job. Fitts and Posner (1967) relate the study of human performance to the analysis of processes involved in skilled performance and the development of skills. The key human skills are either universal (inherent in the genetic structure of humans) or learned (perceptual-motor skills and language skills). Most psychologists, however, see performance essentially in terms of two human-related factors of ability and motivation (Anderson and Butzin 1974). However, performance is also influenced by group and organizational performance. Blumberg and Pringle (1982) allude to the active management of work and organisational support in their performance formula:

Performance = Individual attributes x Work effort x Organisational support

But managers can seldom influence the organisational and environmental factors which may impact upon individual performance. What they can, and should do, is to identify performance factors that they can control (eg. organisational climate) and take action to influence them in the desired ways. In other words, managers should manage the performance of individuals and teams.

Armstrong (1994) defines performance management as a means of achieving better results from the organisation, teams and individuals by understanding and managing performance within an agreed framework of planned goals, standards and competence requirements. The aims of performance management are: 1) to achieve objectives, 2) to utilise and develop competence, and 3) to be effective. This implies that understanding of performance management is rooted in the notion that people perform better when they know what the objectives are, what is expected of them and have the opportunity to participate in forming those objectives and expectations. Armstrong (1994) suggests that three concepts of organisational effectiveness underpin performance management:

The need to clarify strategy and values The importance of providing channels for two-way communication The benefits derived from operating as a learning organisation

On the other hand, Blanchard and Blanchard (1991) view good performance management from a training perspective, and suggest that it is comprised of three processes: performance planning, coaching, and evaluating.

Since managers’ performance is inextricably linked to work team performance, Jones (1995) points out that managers should pursue a management strategy that creates the right work environment for their workers/teams to grow, learn and develop.

Measuring managerial performance Performance measurement is an essential role of managers. It provides the necessary information to control processes and quality by establishing mechanisms to assess organisation effectiveness. Thorndike (1949) was the first one to measure effectiveness by initially defining some ultimate criteria. However, it was Campbell (1974) who identified 19 different variables used to measure effectiveness. The most

60



commonly used univariate measures are: 1) overall performance (measured by employee or supervisory rating); 2) productivity (actual output data), 3) employee satisfaction (self-report questionnaires), 4) profit (accounting data), and 5) withdrawal (turnover or absenteeism data). However, due to the lack of objectivity and comprehensiveness of univariate measure (Steers, 1975), researchers have been attracted to multivariate models of effectiveness that include measures such as adaptability, flexibility and productivity.

Despite these efforts, researchers have recognised the complexity of performance construct and its measurement. In response to this, Mintzberg (1973), Kotter (1982) and Luthans et al. (1988b) argue for a more practical approach that examines the relationships between specific observable managerial activities and organisational effectiveness. However, this approach provides only a partial solution and doesn’t lead to the development of a comprehensive model of organisational effectiveness involving the analysis of numerous variables.

Project organization One of the major concerns of organisations today is the coordination of work across many independent units and functions. However, specialisation, one of the pillars of the classical school of management, is essentially self-serving and parochial, and therefore is not suited to coordinated and collaborative efforts. Lawrence and Lorsch (1967a,b) refer to this organisational dilemma as the problem of integration versus differentiation. They define differentiation as the specialisation of individuals and units, while integration is the quality of the state of collaboration among departments for achieving unity of effort as demanded by the environment.

Walker and Lorsch (1968) found that functional specialists are goal-oriented, time-oriented and have a perception of the formality of organisation, while integrators achieve more effective communication flow and conflict-resolution. However, what has preoccupied numerous theorists over the past few decades is the issue of how to create a collaborative environment in a competitive and changing world, and how to overcome the difficulties facing by the integrators, who have the responsibility to create such an environment. The root of these challenges lies in interplays between many factors and conditions that affect collaborative or team effort, including leadership style, organisation culture, group composition and the extent of differentiation among members and groups. Lawrence and Lorsch (1967b) suggest that integrators have little line authority and primarily rely on their ability to persuade others to support them. Therefore, their effectiveness largely depends on their ability to secure the trust and respect of others. Another factor affecting the role of integrators is the nature of groups and their goals. Lawrence and Lorsch (1967b) and Galbraith (1977) suggest that the more different the members are, the more different their goals are and the more difficult it is to integrate them effectively. Similarly, Landsberger (1961) identifies four classic dilemmas in coordinating dissimilar groups: 1) flexibility vs stability, 2) short-run vs long-run, 3) individual’s goals vs organisation’s goals, and 4) operationality of subgoals (whether organisational decisions should be based on factors considered important, but difficult to measure, or only on factors that can be properly measured).

An effective integrator keeps not only the long term interests of the organisation in mind but also balances the interests of different people and adjusts to changing circumstances and conditions. These latter roles, as Morris (1979) points out, reveal the importance of interface management in project management. He applies relevant organisation theories to management interfaces to highlight key managerial principles in project management that includes system approach, boundary management, organisation’s objectives, environment, technology and integration.

Morris concludes that the size, speed and complexity of a project influence the degree of integration required. Furthermore, the degree of differentiation and interdependence across an interface determine the type of integration required. The ability to balance the two functions demands multi-perspective views of project tasks and functioning, political sensitivity and negotiation skills (Wilemon and Cicero, 1970).

Effective project management In the context of traditional management, project management is about managing several key processes or functions: planning (to identify project objectives and the end product), coordination (to match tasks and

61



resources), controlling (to ensure quality individual and team performance), reporting (to inform and communicate key issues and problems), and implementing (to deliver project objectives). It is widely agreed that effectiveness of these processes depends on several factors from the outset, including: top management support, realistic goals, appropriate project structure, an effective information management system and leadership. The main difficulties of project management, however, as Taylor and Watling (1970) describe, is related to the difficulty of the job (change, complexity, technology), the attitude of senior managers, and external factors such as subcontractors and suppliers. However, of all these factors, lack of authority is considered to be the most critical factor inhibiting project managers from performing effectively. While authority is the power granted to individuals, responsibility is the obligation incurred by individuals in their roles in the formal organisation. Accountability, on the other hand, is the state of being totally answerable for the satisfactory completion of a specific assignment. Kerzner and Thamhain (1984) suggest that while authority and responsibility can be delegated downward to lower levels in the organisation, accountability usually rests with the individual manager. It is evident that a project manager, who lacks authority, cannot be expected to be fully responsible and accountable to the stakeholders.

Experts in the field of project management emphasise different aspects of project management processes as critical for effective project delivery. They variously argue that effective project management is related to the effectiveness planning and control systems (Mustapha, 1990; Ashley et al., 1987), leadership and competent people (Gilbert, 1983), and goal-orientation and communication (Barnes, 1991). However, as noted in the previous section, the perception of effective performance and factors affecting it differs among the project stakeholders. Furthermore, some researchers have found that there is no universal set of project success factors. The concern over compatibility of project success and project effectiveness has led many researchers to relate effectiveness factors to the roles or skills attributed to project managers.

Given that the project manager is an individual who is responsible for coordinating and controlling project processes across multiple and functional lines, it is reasonable to argue that the project manager will require some specific competencies not required, or required to a lesser degree, by say, a functional manager. For example, while a typical functional manager has been taught to standardise all operations, a project manager must learn to adapt and implement change to control work processes. Morton (1975), therefore, describes the project manager as a change agent who should have people skills to keep project teams focused on tasks and goals. In this role, they also often act as a buffer between higher management and the numerous external organisations, and therefore have to play different roles, sometimes at the same time, to hold the project together. Effective project managers often have a fairly long practical experience in the industry and display many skills and attributes in communication (Coulson-Thomas, 1990; Posner, 1987; Einsiedel, 1987), leadership (Zimmerer and Yasin, 1998; Tilley, 1997; Chan, 1994), result-oriention (Kerzner, 1987) and planning (Cicmil, 1997).

Environmental factors In any social system, each component has specific tasks and responsibilities. However, system components are interdependent, which means that they depend on each other to achieve their individual goals and system objectives. In organisations, people are allocated tasks according to their specialisation and contribution. They organise and synchronise their work with others in the chain of tasks to facilitate smooth running of operations and effective delivery of products or services. However, organizations are affected by many other factors. (Kakabadse and Kakabadse, 1997; Jones, 1995 Mintzberg, 1973; Selznick, 1957). While some of the factors are organizational and hence can be controlled or eliminated, others are environmental or situational which are often unpredictable or outside of organization's control. This research focuses on the former type of factors and investigates the effects of project and organization structure, leadership style, and climate on project management.

RESEARCH METHOD A survey questionnaire was designed and pilot-tested. It was then mailed out to 625 managers from major industries (construction/property, communication/information technology, defence, finance, government

62



administration, manufacturing and others) in public and private sectors in Australia. The rate of returns and useable returns were 52% (322) and 48% (301) respectively. The highest number of useable returns came form construction and property (136 or 45%), followed by public administration (54 or 18%) and communication and information technology (48 or 16%). Only categories with at least thirty cases of returned questionnaires were analysed so that plausible inferences can be made (Sekaran, 1992, and Gay and Diehl, 1992). The analysis of personal data suggests that the average respondent was male, 35-55 years old, with at least 5 years of work experience. He was likely to have a bachelor degree in engineering and was working as a manager in the construction/property or communication/information technology industry.

The mean scores of items or elements for each factor were used to rate the perception of their importance. Spearman’s correlation and One-Way ANOVA showed no significance differences (p>0.05) between the respondents, enabling the study to proceed without the need for separate analysis of each category.

FINDINGS Organizational factors The findings indicate that an overwhelming majority of respondents associate project managers’ performance with either professional (109) or teamwork (90) organisation structure. They are followed by entrepreneurial (34) and network (23). The evidence suggests that today’s organisations value professional behaviour and collaborative efforts over rigid control and hierarchy.

Further, the ideal organisational leadership style is perceived to be supportive of team members (86). However, a significant number of respondents identify participative (78) and achievement-oriented (74) to relate to effective performance. As expected, directive leaders are not ranked highly since the majority of today’s employees are professionals with a great degree of autonomy and self-motivation.

The findings also show that 93 (33.7%) of all respondents prefer open climate to other types of organisational climate. This is followed by task-orientation (64) and supportive culture (62) respectively. There is very little support for controlled (6) or closed (0) organisation climate.

Project factors The findings identify matrix structure to be the most appropriate type of project organisation. Almost 2/5 of respondents (126) correlate project matrix with effective performance followed by project team (86), balanced matrix (42) and functional matrix (5). As expected, functional structure has no place in project management.

Almost 1/3 of respondents (102) think that project managers improve their performance if they adopt an achievement-oriented leadership style in their projects. Other respondents, however, relate participative (76) and supportive (63) leadership style to effective performance. Again, directive leadership style is perceived to be inappropriate when managing project team members who are often independent subcontractors and suppliers, or senior managers such as functional managers and project director.

Finally, more than 1/3 of respondents (102) perceive that project managers who create a task-orientation climate in their projects perform more effectively than other types of project climate. Supportive and open project climates are ranked second and third with 68 and 62 responses respectively. While more respondents (93) think that openness characterises effective organisation, a larger number of respondents (102) choose task-oriented project to be the ideal project climate.

Regression with optimal scaling The goal of categorical regression with optimal scaling is to describe the relationship between a response and a set of predictors. By quantifying, values of the response can be predicted for any combination of predictors. In this research, the response is the score that each respondent assigns to their actual performance and predictors are the actual responses for organisation and project factors of structure, leadership style and climate. The relative importance is used to interpret

63



predictor contributions to the regression. Large individual importances relative to the other importances correspond to predictors that are crucial to the regression. This measure defines the importance of the predictors additively, that is the importance of a set of predictors is the sum of the individual importances of the predictors. Table 1 displays the importances for the actual organisation and project factors (predictors).

Table 1. Actual organisation and project factor importances

The largest importance corresponds to project structure (0.327) followed by organisation climate (0.282), with project structure, organisation climate, project leadership style and project climate accounting for 92.5% of the importance for this combination of predictors. The results highlight that project factors have the greatest impact on project manager’s performance.

DISCUSSION

The analysis indicates that a project manager’s performance is influenced more by project factors than organisation factors. The only organisation predictor that significantly affects performance rating is the organisational climate. In contrast, all three project predictors, particularly project structure, affect performance rating.

The evidence shows that an overwhelming number of respondents correlate open, professional and supportive organisation with effective performance. This is consistent with the description of project-oriented jobs and project managers’ position within organisational hierarchy. Given the nature of project jobs, including geographical distance from the head office, the lack of project managers’ authority over project team members, and their reliance on others⎯particularly functional managers and their staff⎯to obtain resources, the project manager would prefer to deal with people who prioritise the organisation’s interests over the organisation/functional politics or personal grudges. The rapid pace and urgent demands of a project, particularly in the implementation phase, require organisation members to see themselves as the members of project team and provide their professional advice speedily and impartially. This means that project managers need the active support of the top management for their project. However, Black (1996) points out that top management support is often insufficient and a major cause of project failure. The priority that top managers place on a project can influence the relationship between project managers and organisation members and ultimately the project success. Despite the importance of these factors, an overwhelming majority of research in project management focuses on project activities and processes, rather than project-organisation relationships. For example, while project leadership style has been studied (Adams and Barndt, 1988; Bresnen et al., 1986; Lansley et al., 1974), no empirical research has been conducted into the relationship between organisation leadership and project managers’ performance. The evidence from this study also shows that project managers who work in a project matrix and adopt an achievement-oriented leadership style get the job done more effectively.

Organisational structure 7.47E-02 0.066 1.269 0.098 0.076 0.072 0.063 0.917 0.922

Organisational leadership 6.33E-02 0.065 0.962 -0.022 -0.066 -0.062 0.012 0.967 0.933

Organisational climate -0.15 0.067 4.934 -0.221 -0.148 -0.141 0.282 0.886 0.854

Project structure 0.166 0.066 6.338 0.232 0.168 0.16 0.327 0.932 0.949

Project leadership 0.131 0.065 4.125 0.161 0.136 0.129 0.18 0.966 0.988

Project climate -0.107 0.066 2.611 -0.149 -0.109 -0.103 0.136 0.923 0.87

Factor

Beta

Correlations

After transformation

Before transformation

Standarised Coefficients

St.Error FZero-order Partial Part Importance

Tolerance

64



Research in project management has shown that project managers tend to be task-oriented (Djebarni and Lansely, 1995; Bresnen et al., 1986). However, a direct comparison between the findings of this study and previous studies is not possible as researchers use different leadership style taxonomies and the context of research may also be different. The findings in this study show that project managers’ performance is correlated with a task-oriented project climate. This is because just as projects are building blocks of businesses, tasks are building blocks of project delivery. Kerzner and Thamhain (1984) suggest that project managers can significantly influence project climate by their actions. They should aim to create and maintain an organisation climate that supports project teams in completing their jobs. This can be facilitated by project managers’ ability to communicate and solve problems effectively. Galbraith (1971, 1977), Lawrence and Lorsch (1967b, 1969) and Davis and Lawrence (1977) point out that horizontal communication in a matrix organisation requires an open and problem-solving climate. Given the criticisms that have been laid against customer organisations for not being proactive and organised (Frame 1994; Chern and Bryant, 1984), it is critical that channels of communication between project manager and customer organisation, preferably through a knowledgeable customer representative, are established early in the project in order to inform and synchronise efforts.

REFERENCES Adams, J. R. and Barndt, S. E. (1988). Behavioural implications of the project life cycle. In: D. I. Cleland

and W. R. King, Project Management Handbook (2nd ed.), Van Nostrand Reinhold. Adler, N. (1995). Competitive frontier: Global management in the 21st Century. HRMonthly, March. Anderson, N. H. and C. A. Butzin (1974). Performance = Motivation x ability: An integration:

Theoretical analysis. Journal of Personality and Social Psychology, v.30, n.5, pp.598-604. Armstrong, M. (1994). Performance management. Kegan Page Ltd. Ashley, D. B., Lurie, C. S. and Jaselskis, E. J. (1987). Determinants of construction project success.

Project Management Journal, v.18, n.2, pp.69-79. Barnes, M. (1991). Innovation: Why project management is essential to successful business. International

Journal of Project Management, v.9, n.4, p.208. Bennis, W. (1979). In: One more time: Why project management? (F.A. Stickney and W. R. Johnston).

Proceedings of Seminar/Symposium of the Project Management Institute. Black, K. (1996). Causes of Project Failure: A Survey of Professional Engineers. PM Network,

November, pp.21-4. Blanchard, K and Blanchard, M. (1991). Managing performance. Executive Excellence, Nov. p.3. Blumberg, M and Pringle, C. (1982). The missing opportunity in organisational research: Some

implications for a theory of work performance. Academy of Management Review,v.7. n.4, pp.560-569.

Boyatzis, R. E. (1982). The competent manager: A model for effective performance. John Wiley and Sons.

Bresnen, M. D., Bryman, A. E. Ford, J. R., Beardsworth, A. D. and Keil, T. (1986). Leader orientation of construction site managers. Journal of Construction Engineering, v.112, n.3.

Campbell, J. P. (1974). The measurement of organisational effectiveness: A review of relevant research and opinion. Minneapolis: Personnel Decision.

Campbell, J. P., Dunnette, M. D., Lawler III, E. E., Weick Jr., K. E. (1970). Managerial behaviour, performance, and effectiveness. New York: McGraw-Hill.

Chan, A. P. C. (1994). Managing responsibility of project managers. Australian Institute of Building Papers, v.5, p.109.

Cherns, A. B. and Bryant, D. T. (1984). Studying the customer’s role in construction management. Construction Management and Economics, v.2. pp.177-184.

Cicmil, S. J. K. (1997). Critical factors of effective project management. TQM Magazine, v.9, n.6, pp.390-396.

Coulson-Thomas, C. J. (1990). Project management: A necessary skill? Industrial Management and Data Systems, v.6, pp.17-21.

65



Davis, S. M. and Lawrence, P. R. (1977). Matrix. Mass: Addison-Wesley. Djebarni, R. and Lansley, P. (1995). Impact of site managers’ leadership on project effectiveness. First

International Conference on Construction Project Management, Singapore. Einsiedel, Jr. A. A. (1987). Profile of effective project managers. Project Management Journal, v.18, n.5,

pp.51-56. Frame, J. D. (1994). The new project management: Tools for an age of rapid change, corporate

engineering, and other business realities. Jossey-Bass Inc.

Gaddis, P. O. (1991). The project management. Harvard Business Review, pp.29-38. Galbraith, J. (1977). Organisation design. Mass: Addison-Wesley Publishing Company. Galbraith, J. R. (1971). Matrix organisation design. Business Horizons, Feb., pp.29-40. Gay, L. R. and Diehl, P. L. (1992). Research methods for business and management. Macmillan

Publishing Company. Gilbert, G. P. (1983). Styles of project management. Project Management Journal, v.1, n.4, pp.189. Graham, P. (1997). Projects, people, and practices. Engineering Management Journal, v.3, n.3. Guion, R. M. and Gottier, R. F. (1985). Validity of personality measures in personnel selection. Personnel

Psychology, v.18, pp.137-164. Heneman, R. L. (1986). The relationship between supervisory ratings and results-oriented measures of

performance: A Meta-analysis. Personnel Psychology, v.39, pp.811-826. Jones, T. W. (1995). Performance management in a changing context: Monsanto pioneers a competency-

based developmental approach. Human Resource Management, v.34, n.3, pp.427. Kakabadse, K. A. and Kakabadse, N. K. (1997). Best practice in the Australian public service. Journal of

Managerial Psychology, v.12, n.7, p.442. Kast, F. E. and Rosenweig, J. E. (1985). Organisation and management: A system and contingency

approach. McGraw-Hill. Kerzner, H. (1987). In search of excellence in project management. Journal of Systems Management,

Feb., pp.30-39. Kerzner, H and Thamhain, H. J. (1984). Project Management for small to medium size businesses. Van

Nostrand Reinhold Company. Kotter, J. (1982). The general manager. The Free Press. Lansley, P., Sadler, P. and Webb, T. (1974). Organisation structure, management style and company

performance. OMEGA: The International Journal of Management Science, v.2, pp.467-485. Lawrence, P. and Lorsch, J. (1967). New management job: The integrator. Harvard Business Review,

p.45. Lawrence, P. R. and Lorsch, J. W. (1969). Developing organisations: Diagnosis and action. Mass:

Addison-Wesley. Luthans, F., D, Welsh H. B. and Taylor III, L. A. (1988). A descriptive model of managerial

effectiveness. Group and Organisation Studies, v.13, n.2, pp.148-162. Mintzberg, H. (1973). The managerial work. New York: Harper and Row Publishers. Morris, P. W. (1979). Interface management: Organisation theory approach to project management.

Project Management Quarterly, v.10, n.2, pp.27-37. Morton, D. H. (1975). Project manager, catalyst to constant change: A behavioural analysis. Project

Management Quarterly, v.6, n.1, pp.22-33. Mustapha, F. H. (1990). Who are the effective site managers and what skills do they bring to their work?

PhD thesis, Bath: University of Bath. Posner, B. Z. (1987). What it takes to be a good project manager. Project Management Journal, v.18, n.1,

pp.51-54. Reddin, W. J. (1974). Managerial effectiveness in the 1980’s: Management by objectives. New York:

McGraw-Hill. Roskin, R. (1975). Situational management skills. Journal of Education Training, n.1, pp.67-78. Sekaran, U. (1992). Research methods for business. (2nd ed.), John Wiley & Sons Inc. Selznick, P. (1957). Leadership in administration: A sociological interpretation. University of California

Press. Steers, R. M. (1975). Problems in the measurement techniques. New York: John Wiley.

66



Steingraber, F. G. (1990). Managing in the 1990s. Business Horizons, Jan.-Feb., pp.50-61. Taylor, W.J and Watling, T. F. (1970). Successful project management. (2nd ed.) Business books. Thorndike, R. L. (1949). Personnel selection: Test and measurement techniques. Journal of Applied

Psychology, v.65, pp.351-354. Toffler, A. (1970). Future Shock. Bodley Bay, London. Walker, A. H. and Lorsch, J. W. W. (1968). Organisational choice: Product vs. function. Harvard

Business Review, Nov.-Dec., pp.75-84. Wilemon, D. L. and Cicero, J. P. (1970). The project manager: Anomalies and ambiguities. Academy of

Management Journal, Sept., pp.269-282. Zimmerer, T. W. and Yasin, M. M. (1998). A leadership profile of American project managers. Project

Management Journal, v.29, n.1, pp.31-38.

67



Enrich Knowledge through

Quality Research

An International Journal Published by Academy of Knowledge Process

www.akpinsight.webs.com Copyright © 2011 IJCBS

Documents

Ijcbs Vol 2 No 4 April 2011 Issn 2156-7506