The latest directives issued by the Insurance Board laying down certain guidelines for insurance companies is a legitimate move of the regulator in reiteratively trying to put some order in the captive insurance industry of Nepal. The directives include putting a cap on remuneration of insurance companies’ CEOs, preventing more than one member of a family from assuming post of director in the same company, barring insurers from selling policies to promoters and restricting the insurance companies from parking their premium in financial institutions promoted/ owned by their promoters. Issues like these have been raised by the Insurance Board in the past, but were not being observed by the companies; and the Board was unable to press the companies into conformity due to lack of its capacity and coerciveness.
Currently, most of the big insurance companies in Nepal are promoted by business houses. Any captive business anywhere in the world has potential for ethical conflicts and so does the insurance business in Nepal. Business houses have been using their insurance companies to insure their own business risks at discounted rates, avoiding high insurance premiums, especially on high risk business operations like aviation and benefiting from an inside advantage. Although it is the responsibility of the board of directors of these captive insurance companies to deal fairly, avoid conflicts of interest and not exploit opportunities for their own interest, it is unfortunate that corporates in Nepal are aware more of their rights than responsibilities. Due to this attitude of businesses, the onus of acting as watchdogs falls clearly on market mechanisms and regulators.
Unlike in the US and the UK, organizations in Nepal still grapple with the challenge of keeping the owners detached from the management of businesses. CEOs are mostly representatives of the owners with no influence or control on the composition of the company boards.
Another unfolding trend is the legal consequences that boards of various cooperatives are lately facing. Bulk of cooperative boards consists of superannuated, well-heeled practitioners and professionals whose understanding of financial statements, rules and regulations is often limited; who accept board position without any due diligence of past financial records, and without understanding the accountability that comes with it. Consequently, when the going gets tough and the cooperatives are siphoned off into bankruptcy and poor financial reporting, it is the board of directors that is pulled up and penalized.
Again, a majority of businesses in Nepal are both family-owned business or lifestyle businesses run by small entrepreneurs and one would assume that such closely held businesses would be clean and transparent in operations due to owners’ constant engagement. However, in most cases, the opposite is true. Stories of Ford Motor Company in the U.S and Satyam Computer Systems Ltd in India have proved that worldwide family-owned companies have had serious corporate governance lapses.
In Nepal, a mere 0.2 percent of businesses are listed on the stock exchange, and out of the total 222 companies listed, 86 percent comprise of banking, financial and insurance companies. Banking and financial institutions are better compliant because Nepal Rastra Bank (NRB) is a stronger regulator. Other than that, regulation of all companies, especially the unlisted ones is extremely weak. Even in case of listed companies, Securities Exchange Board of Nepal (SEBON) is not effective as a regulator; its inability in calling the Annual General Meeting (AGM) of National Hydro Company, which has not had an AGM for the last 3 years despite consistent complaints from public shareholders, amply shows its limitations. The Companies Act, 2006 has designated the Office of Company Registrar (CRO) as the administrator of companies in Nepal. CRO not only lacks the power of a regulator, but also does not play a very proactive role in correction of slip-ups by businesses, especially in the case of private companies.
Poor governance is not only prevalent in Nepal Inc, but our own government and bureaucracy, as well as bilateral and multilateral organizations operating in Nepal have also shown stark failures on the corporate governance front. Ranging from misuse of foreign aid, to siphoning off funds allocated for development objectives like schools, healthcare and infrastructure, accountability is greatly comprised and almost non-existent. Most visible abuses happen at the local governments where tendering processes are jagged, accounts are cooked and auditing is thwarted. Donor funded programs are implemented through local NGOs and community groups, majority of which are politically influenced.
On the other hand, the cancellation of tender of Rupantaran Nepal—a non-profit organisation based in Kathmandu—to implement the four-year forestry programme worth NPR 4.45 billion, funded by the British, Finnish and Swiss governments for no compelling reason besides changed political context, is the most recent example of donors succumbing to vested political interests.
The question now is how we can get Nepali businesses and organizations to become more compliant and responsible. Since the key to better corporate governance lies in the maturity and vibrancy of capital markets, it is felt that many of the governance lapses can be addressed to a large extent if businesses (of certain size) are necessitated to get listed in the market. Further, capacity of SEBON should be built so that it can induce listed companies to adhere to high standards of disclosure and moreover, functioning of SEBON itself should be made more transparent. Since a good portion of the national budget is financed by donors, government should ensure that development programs are aligned to the national plan and the donors are made accountable for the result of these programs. Accountability mechanisms like adhering to mutually agreed codes of conduct on various programs and review of impacts of these programs by the stakeholders through public private dialogues (PPDs) could be effective governance checks.
On another front, bankruptcy laws should be made stronger and practical such that insolvent businesses come out in the open without having to dodge blacklisting and other consequences. Directorships on boards should be taken carefully and for purpose; owners cum directors should exercise self discipline, recognize their responsibilities to their stakeholders and open themselves to external scrutiny. And media can play a meaningful role in achieving greater accountability through tools of investigative journalism, independent analysis and reporting.
The author is a co-founder of beed—an international management consulting and advisory services firm.