Unit 2
Governance and Accountability
The concept of public enterprises comprises of two terms 'Public’ and ’Enterprise’. Enterprises which are owned and managed by public authority is called public enterprise. Alternatively, public enterprises are social enterprises owned by society. In a democracy, the Government and the Parliament are the true representative of the people. So, a PE has to account for its activities and performance to its owners through the Parliament and the other agencies. In this paper, it will be our Endeavour to explain the definitions of accountability together with autonomy, government policy regarding accountability and autonomy, control of parliament. Functions of Comptroller & Auditor General (CAG) and different functions of Committee on public undertakings in controlling the F'SUs in so far as its role in ensuring accountability. The term accountability implies rendering of the detail activities or giving detail account of the performance of the PEs by its managements, to it supreme authority and be answerable to it for any discrepancies. Since all investments in PEs are made from public funds, it is quite natural that management should be accountable to the Parliament for their performance in terms of the objectives for which the enterprises 'are established. In a democratic country it has impossible to deny rationality of accountability, but some problems regarding public accountability have arisen.
Balance of Autonomy - Accountability: Autonomy and accountabi1ity is must conflicting problems of PEs. PEs should run efficiently on commercial lines and they should be granted sufficient autonomy in their operation. As public money is invested in PEs, the question of complete autonomy does not arise. Likewise, we have seen that controlling authority should not be conscious for its day-to-day operation but for major business policy guidelines, etc., for management. There is a need for exact definition of autonomy and accountability but no such definition has been developed. It has been remarked in an U.N. Report that "the balance between financial freedom of an enterprise and central control is a delicate one and few countries could claim a paramount solution. But recommendation of COPU ’appreciate the concept of the Memorandum of Understanding (MoU) as it would result in better efficiency of the concerned undertaking. MoU is an agreed document entered for three-to-five-year period between the Government and Company. The MoU would be drawn up on the basis of agreed plans for investment, production, profits etc. The performance plan is prepared to evaluate the objectives of MoU at the end of the year, within the purview of this document, PEs are free to operate because government will not interfere in this matter. But in default, the PEs will be answerable to the Government. So, we conclude that the idea of MoU is suitable to maintain a balance between autonomy and accountability.
Interface with Government/ Ministries-
I. Formal: The Parameters of formal relationship and the way it would operate are laid down in the Articles of Association of a Government Company, and in the Acts of Parliament for the statutory corporations.
Ii) Informal: This is exercised through personal communications, through Government directors on the Board, and through written communications suggesting a course of action for the consideration of the enterprise. Obviously, in case of informal influence, the responsibility for the decision and for its consequence is of the enterprise and not of the Government. An important aspect of informal relationship, that the Government exercises much authority over its enterprises without accepting responsibility of its consequences. For example, the government may suggest to the enterprise to award a contract to a party, to purchase from a particular source, locate a new unit at a particular location, or not to increase the price of its products. Now, if the enterprise follows the advice and suffers a loss, the Government official or the minister could deny his role, or say that he never ordered the course but had only suggested it for the consideration of the enterprise. But the wishes of the senior officials of the Government or of the concerned minister are in practice or less than orders. It is so because PEs often depend heavily on the government for all their funds and also for numerous day-to-day approvals, clearances and other help.
Let us discuss three dimensions of Government - PE Interface, which are as follows:
1.The Government as Owner: The government interacts with a PE in three capacities. First, as owner for most PEs, the government supplies the whole or majority of the capital, and is therefore interested in getting an adequate return on its investment and also for the safety of its funds.
2.Government as Government: Secondly as regulator of the economy, the Government would like PEs to follow various policies, rules and regulations as in case of private enterprises, for example, policy regarding foreign collaboration, location of unit, price control, import substitution, etc. similarly, laws of the land including labour laws are applicable to both the sectors.
3.Government as Lender of Funds: Thirdly, as lender of funds, the Government as a banker evaluates capital investment proposals and working capital needs of PEs, and oversees effective utilization of funds. In the case of private sector, these three functions are often distributed: the ownership is widely distributed among the public at large, the regulation is with the Government and its agencies, and the financier’s role is played by the public financial institutions, banks and the capital market.
In PEs, the three roles converge into one body, namely, the Government. And this makes a qualitative difference: the PEs get unduly and excessively regulated, controlled and overseen by the government. The Government also imposes various obligations on PEs which may be incompatible with their efficient management as industrial and commercial entities.
Interface with Parliament and its Committees-
Parliamentary scrutiny of public entity performance is important because it helps to demonstrate whether public entities can account for what they have done and what they have achieved.
At its most simple, the work of public entities follows a regular annual cycle of:
- Planning – deciding which activities to carry out, including identifying priorities and performance goals;
- Performing – doing the planned activities to agreed standards of quality, cost, and timeliness;
- Reporting – describing the results of the work carried out, demonstrating economy, efficiency, and cost-effectiveness; and
- Scrutiny – reports are reviewed to ensure that public entities are properly accounting for their performance.
As part of the reporting phase, Budget information, statements of intent, and period-end financial and service performance reports are provided to members of Parliament. These set out:
- What the Government is trying to achieve;
- The goods and services the Government buys to achieve these outcomes;
- The cost of producing these goods and services;
- The financial performance expected from departments, State-owned enterprises, and Crown entities; and
- The actual service and financial performance achieved.
The scrutiny phase follows these reports. New Zealand's select committee system enables members of Parliament to look at matters in more detail than is possible in the House of Representatives. Select committees examine the Government's spending and the performance and operations of Government departments, Crown entities, and State-owned enterprises. They do this by reviewing the Budget and end-of-year information, commenting on them, and reporting to Parliament.
Select committees can also provide the public with an opportunity to comment on and suggest changes to draft legislation, and to participate in other Parliamentary functions, such as inquiries. They also report to Parliament on reports received from the Officers of Parliament (such as our Office).
The Comptroller and Auditor General of India is the Constitutional Authority in India, established under Article 148 of the Constitution of India. They are empowered to Audit all receipts and expenditure of the Government of India and the State Governments, including those of autonomous bodies and corporations substantially financed by the Government.
The CAG is also the statutory auditor of Government-owned corporations and conducts supplementary audit of government companies in which the Government has an equity share of at least 51 per cent or subsidiary companies of existing government companies. The reports of the CAG are laid before the Parliament/Legislatures and are being taken up for discussion by the Public Accounts Committees (PACs) and Committees on Public Undertakings (COPUs), which are special committees in the Parliament of India and the state legislatures. The CAG is also the head of the Indian Audit and Accounts Department, the affairs of which are managed by officers of Indian Audit and Accounts Service, and has 43,576 employees across the country (as on 01.03.2020).
In 1971, the central government enacted the Comptroller and Auditor General of India (Duties, Powers, and Conditions of Service) Act, 1971. In 1976, CAG was relieved from accounting functions. Articles 148 – 151 of the Constitution of India deal with the institution of the CAG of India.
Appointment
The Comptroller and Auditor-General of India is appointed by the President of India
Duties of the CAG
As per the provisions of the constitution, the CAG's (DPC) (Duties, Powers and Conditions of Service) Act, 1971 was enacted. As per the various provisions, the duties of the CAG include the audit of:
- Receipts and expenditure from the Consolidated Fund of India and of the State and Union Territory having legislative assembly.
- Trading, manufacturing, profit and loss accounts and balance sheets, and other subsidiary accounts kept in any Government department; Accounts of stores and stock kept in Government offices or departments.
- Government companies as per the provisions of the Companies Act, 2009
- Corporations established by or under laws made by Parliament in accordance with the provisions of the respective legislation.
- Authorities and bodies substantially financed from the Consolidated Funds of the Union and State Governments. Anybody or authority even though not substantially financed from the Consolidated Fund, the audit of which may be entrusted to the CAG.
- Grants and loans given by Government to bodies and authorities for specific purposes.
- Entrusted audits e.g., those of Panchayati Raj Institutions and Urban Local Bodies under Technical Guidance & Support (TGS).
Role of the C&AG in regard to audit
The Comptroller and Auditor General is the sole authority prescribed in the Constitution entrusted with the responsibility of audit of accounts of the Union and of the States. It is the duty of the Comptroller and Auditor General to audit receipts and expenditure of the Union and each State and the Union Territory Governments. The audit reports of the Comptroller and Auditor General are placed before Parliament or the legislature of the State or the Union Territory, as the case may be. The duties of the Comptroller and Auditor General also extend to audit of Government companies and corporations and bodies and authorities in accordance with the laws made by the legislature and rules made there under.
Broad objectives of audit
The broad objectives of audit are to ensure legality, regularity, economy, efficiency and effectiveness of financial management and public administration mainly through assessment as to:
- Whether the financial statements are properly prepared, are complete in all respects and are presented with adequate disclosures (financial audit);
- Whether the provisions of the Constitution, the applicable laws, rules and regulations made thereunder and various orders and instructions issued by competent authority are being complied with (compliance audit); and
- The extent to which an activity, programme or organisation operates economically, efficiently and effectively (performance audit).
The Committee on Public Undertakings is a Parliamentary Committee consisting of 22 Members, fifteen of whom are elected by the Lok Sabha every year from amongst its members according to the principle of proportional representation by means of a single transferable vote and seven Members to be nominated by Rajya Sabha for being associated with the Committee. The Chairman is appointed by the Speaker from amongst the Members of the Committee. A Minister is not eligible to become a Member of the Committee. If a member after his election to the Committee is appointed a Minister, he ceases to be a Member of the Committee from the date of such appointment. The term of the Committee does not exceed one year.
Mode of the election of Committee on Public Undertakings’ members:
The members of the committee are elected annually by the Parliament from amongst its members using the principle of Proportional Representation (PR) by means of Single Transferable Vote (STV.) This election method gives equal representation to all the members of the Parliament.
The functions of the Committee on Public Undertakings are :- (a) to examine the reports and accounts of Public Undertakings specified in the Fourth Schedule to the Rules of Procedure and Conduct of Business in Lok Sabha ; (b) to examine the reports, if any, of the Comptroller and Auditor General of India on the Public Undertakings ; (c) to examine, in the context of the autonomy and efficiency of the Public Undertakings whether the affairs of the Public Undertakings are being managed in accordance with sound business principles and prudent commercial practices ; and (d) to exercise such other functions vested in the Public Accounts Committee and the Estimates Committee in relation to the Public Undertakings as are not covered by clauses (a), (b) and (c) above and as may be allotted to the Committee by the Speaker from time to time.
The limitations of the Committee on Public Undertakings are given below:
- There is a cap on the number of PSUs it can examine reports of. The committee cannot take upon reports of more than 10-12 PSUs in a year.
- It only examines the reports. It has no role in deciding the functioning of PSUs. Hence, its work is only like a post-mortem.
- The committee is not concerned with any technical matters of PSUs as there are no technical experts as members of the committee.
- All the recommendations put forward by the committee are advisory and ministers are not bounded by any of those.
Working of the Committee
The Committee selects from time to time for examination such Public Undertakings or such subjects as they may deem fit and as fall within their terms of reference. The Ministry / Undertaking concerned is asked to furnish necessary material relating to those subjects for information of the Members of the Committee. The Committee may from time to time appoint one or more Study Groups for carrying out detailed examination of various subjects. If it appears to the Committee that it is necessary for the purpose of its examination that on-the-spot study should be made, the Committee undertake tours to study any particular matter, project or undertaking with the specific approval of the Speaker. Notes relating to the Undertakings / Offices etc. to be visited are called for in advance from the Ministries / Undertakings concerned and circulated to the Members of the Committee. These form the starting point for the informal discussion which the Committee holds at the projects etc. When the Committee / Study Groups are on study tour, only informal meetings are held at the place of visit and at such meetings neither evidence is recorded nor any decisions taken. The Members of the Committee while on tour may also meet informally the representatives of Chambers of Commerce and Industry, nonofficial organisations and bodies which are concerned with the subject under examination of the Committee. Later, in the light of these informal discussions of the Committee and the memoranda and other information received, non-official and official witnesses are invited to give evidence at formal sittings of the Committee held in Parliament House / Parliament House Annexe. All discussions held by the Committee with the representatives of the Undertakings/Ministries /Departments, non-official organisations, Labour Unions, etc. are to be treated as confidential and no one having access to the discussions, directly or indirectly, should communicate to the Press or any unauthorized person any information about matters taken up during the discussions.
Theobservations/recommendations of the Committee are embodied in their reports which are presented to Parliament. After a Report has been presented to the House, the Ministry or Undertaking concerned is required to take action on various recommendations and conclusions contained in the Report. The replies of the Government are examined by an Action Taken Subcommittee/Committee and an Action Taken Report is presented to the House.
What constitutes a fitting harmony amongst autonomy and control in public venture management relies upon the idea of every undertaking. Sadly, there is up 'til now no all-around acknowledged strategy for characterizing public enterprises. There are the same number of grouping plans as there are governments and public venture survey commissions/boards of trustees. Also, heap order frameworks are every now and again embraced for pay and reviewing purposes as opposed to as a component of the general procedure of choosing what every venture remains for and how its issues should be coordinated.
One of the strategies received in grouping public enterprises (particularly in the provincial, and prompt post-pilgrim period, yielded a fourfold order plot, viz:
(i) government offices and administrative agencies (only somewhat expelled from unadulterated common administration associations);
(ii) statutory organizations (body corporates set up by particular empowering acts);
(iii) state-claimed organizations (constrained obligation organizations possessed completely or to some extent by government and subject to constraints forced by apropos organization acts); and
(iv) management agencies and joint endeavours (perpetually, possession lives in government, while management is provided by remote accomplices).
As the quantity of public enterprises expanded, and with the extension in their extent of exercises, the fourfold characterization depicted above ended up lacking. Other than neglecting to demonstrate the sort of results which enterprises in every classification were relied upon to accomplish, the plan gave no guide with respect to how the different enterprises ought to be overseen inside and controlled remotely. In short, the plan demonstrated minimum valuable if the goal was to strike a harmony between administrative autonomy and accountability to outer bodies.
With an end goal to conquer the restrictions forced by the former framework to arrangement, another technique – i.e., order by significant zone of movement – is at times received. With this technique, it is conceivable to recognize three perfect composes viz:
(i) regulatory agencies (e.g., Agency of Standards, National Standards Organizations, Securities and Exchange Boards/Commissions, National Universities Commissions, National Manpower Boards);
(ii) public utilities (e.g., railroads, water sheets, power endeavours and civil transport administrations); and
(iii) profit-production enterprises (banks, insurance agencies, manufacturing and business associations).
Despite the fact that characterization by territory of action speaks to a change over the past strategy, it too is of restricted application to the extent the issues of autonomy and control are concerned. This is likely the purpose behind the prominence appreciated by yet another technique for arrangement, i.e., characterization by 'proprietorship'. The rationale in this arrangement of characterization is clear, i.e., on the off chance that the wellspring of back can be distinguished, the issue of how to administer and control a public venture is effortlessly settled. Is it accurate to say that it isn't every now and again contended that he who bites the bullet calls the tune? The technique for arranging public enterprises by possession is probably going to create the accompanying perfect composes: enterprises completely claimed and financed by the government (e.g. Public utilities, statutory companies, instructive foundations, innovative work agencies); organizations and joint endeavours (e.g. Oil refineries, Petro-synthetic organizations, vendor groups); and overseeing agencies, financed completely or to a great extent, by government however swung over to management specialists or advisors (e.g. National carriers or railroads contracted out to remote organizations).
That the 'proprietors' of a venture should try to control it isn't the question. The inquiry is the thing that frame the control should take. How does the proprietor of an endeavour share the strategies of the undertaking without interfering in everyday administration and without sending clashing signs to the management staff? Valuable as it might be, the idea of proprietorship is equipped for being twisted in the management of public enterprises. Truth be told, unbelievable choices – choices that are probably going to influence the survival and long-haul development of an endeavour – might be taken by the simple certainty of possession. The hands of the 'proprietors' may be tied by earlier authoritative concurrences with management specialists. Predominant management aptitudes and a total dominance of complex innovation may likewise fill in as viable weapons in the hands of outside accomplices looking to keep meddling politicians and civil servants under control. Be that as it may, when the enterprises concerned are completely claimed and financed by government – and especially, when the enterprises are overseen by 'indigens' – the 'proprietors' on the government side are inclined to toss alert to the breezes, if just to demonstrate who is in control.
The issues confronting public enterprises have a tendency to be exacerbated by the way that few 'proprietors' as well as their agents look to practice control in the meantime. The political class and their supporters most regularly take their cases first as the 'proprietors'. The common administration organization, with its own particular personal stakes, may show up in the appearance of 'proprietors' agents', or in some other shape. Also, inside a similar administration, it isn't feasible for the Treasury, the 'parent' ministries, the 'intrigued' ministries and different arms of government to approach a public undertaking to play distinctive tunes at the same time. In the resulting perplexity, public enterprises concerned may play their own particular most loved tune. At the end of the day, any endeavour to force an excessive number of controls in the meantime may leave the enterprises without appropriate control. At the other extraordinary, a plenty of controls might be counter-beneficial from the perspective of administrative viability and proficiency. In this manner, when without the advantage of specialized skill and up and coming data, the 'proprietors' meddle in everyday administration or always veto the chief's choices, the eventual fate of the endeavour might be endangered. This isn't to contend that all control measures are negative or useless. As the following segment appears, there are changed methods for controlling public enterprises and ensuring that they are responsible to their 'proprietors'.
Corporate governance forms the basis for corporations to make decisions that consider many environments, including economic, social, regulatory and the market environment. Corporate governance gets its roots in ethical behaviour and business principles, with the goal of creating long-term value and sustainability for all stakeholders.
Corporate board directors face the continual challenge of aligning the interests of the board, management, shareholders and stakeholders. They respond to their duties and responsibilities with full regard to transparency and accountability.
It's often said that corporate boards are responsible for providing oversight, insight and foresight. That's a tall order in today's marketplace, which is complex and volatile. Good governance principles are fundamental to the work that board directors do.
The Role of the Board of Directors in Corporate Governance
Corporate boards have many duties and responsibilities. In every decision the board makes, they must consider how it will affect their employees, customers, suppliers, communities and shareholders.
Good corporate governance relies on distinct differences in the roles between board directors and managers. It was never intended for board directors to be directly involved in the daily operations of a corporation, and they certainly shouldn't engage in micromanaging the management. The main role of board directors is oversight and planning. Despite the differences, board directors may delegate certain powers to the CEO or CFO under certain circumstances.
Boards also regularly delegate some of their duties to board committees. Corporate board committees act as a subset of the full board. Committees devote the necessary time and resources to issues for which the full board doesn't have time. Committees delve deep into issues, often calling in experts to assist them. Committees provide regular reports to the board on the matters they're charged with handling.
The idea of social responsibility stems from the concern for the ethical consequences of one's acts as they might affect the interest of others. The Gandhian principle of Trusteeship expresses the inherent responsibility of business enterprise towards the mutual responsibilities of these to one another. In its simplest sense, corporate social responsiveness means knowing how to manage a company's relation with external force like, social, political and Governmental reputation that can affect the company.
Bowen'1"’ defines the concept as "the obligation of managers to pursue those policies to make those decisions or to follow those lines of actions which are desirable in terms of the objectives and values of our society'. As we consider the PEs as business units so they have some responsibility towards the society. The responsibility does not end within the tour walls of their factories and their own business etc. They owe a debt to the society which is a means to an end. They build their empire by using the resources extracted from the mines and materials collected from the fields, which belongs to the society at large. When these factories omit dangerous fumes and smokes, damage the natural surroundings, they cannot just say that they are responsible only for running the organization and they do not have any obligation to the society and the people at large.
References:
- Sahai, Baldeo. (1989). Public Sector in India – Historical Perspective in SCOPE: Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai.
- Laha, Chandra, Prakash. (1989). Public Sector: The Socio – Economic and Political Environment in SCOPE: Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai.
- Nigam, K. Raj: Indian Public Sector at the Cross Roads.
- Dynamics of Management of Public Enterprises (ed) Waris R.Kidwai and Baldeo Sahai. New Standing conference on Public Enterprises, New Delhi.
- Rao, S.L. Ownership, Control and Management of Public Enterprises.
