Corporate Governance: Principles, Practices and Reality
A recent report by Grant Thornton assessed that corporate governance practices across the top 150 companies in India have improved, but the female representation on board of companies is still skewed. According to the assurance, tax and advisory firm, while provisions like having a whistle blower mechanism has been widely accepted by India Inc, having a women director in the board is still a challenge for most of them. According to the report, only 7 per cent of the directors are women in India’s top 150 companies in terms of market capitalisation.
Side by side, Chris Pierce, CEO, Global Governance Services, an authority on corporate governance opines that while India is hoping to attract foreign direct investment, global investors are still cautious when it comes to taking a call on the country, mainly due to its corporate governance issues, says. While India is making all the right moves in the Companies’ Act around independent directors, a lot more responsibility needs to be fixed, At this juncture realistically speaking the essentials are missing even in the government sector. Is it not a fact that the corporate governance processes are not being rightly followed even in the Government sector? Is it not a fact that even in the case of selection / appointment of trainer for one of the national level banking training centre the most eligible, highly qualified [having Doctorate degree] and experienced candidate possessing exposures in the national and international level was shown the gate for reason best known to the ultimate selector. Is it not the fact that the recruitment policy followed is a murky and eye washing one? Time has come when the decision [?] taken must be impartially judged by another body so as to ensure transparency!
Any deviation located must face stern action so as to wipe out such a practise from new and emerging India! Partiality, nepotism and narrow outlook must be done away with. Dealing with public money calls for transparency and accountability, among others. PSCs play a key role in all of the sectors of the economy. Need is there for increased transparency, disclosure and accountability in the public sector. Lack of or weaknesses in governance mechanism cause losses in public enterprises – so the culprits should not be spared!
Added to this the well known approach clarifies that ‘director evaluations would be shared with the direction with comments reported verbatim when necessary to make clear any opportunities for improvement. They would also go to the chairman or lead director to provide objective evidence with which to have difficult conversations with underperforming directors. Meaningful board evaluations would also have more subtle effects on board composition and boardroom dynamics. Foreseeing a rigorous review process, underperforming directors would voluntarily not stand for re-election. In fact, directors would work hard to make sure they were not perceived as underperforming’.
In fact corporate governance refers to the set of systems, principles and processes by which a company is governed in as much as they provide the guidelines as to how the company can be directed or controlled such that it can fulfill its goals and objectives in a manner that adds to the value of the company and at the same time is also beneficial for all stakeholders in the long run. Needless to say, those stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society.
In fact Corporate Governance [CG] is a process and structure that is used to: direct and manage business; enhance shareholders’ value as well as ensure financial viability. In a word the very purpose of Governance is to build and strengthen: accountability; credibility; transparency; integrity and of course trust. That is why appropriate governance practises protect: shareholders; customers; public in general; supervisors and the very employees.
On this score OECD has given a nice undisputed definition: corporate governance relates to the internal means by which corporations are operated and controlled. Cadbury Report, 1992, nicely describes the same as the system by which companies are directed and controlled. That is why it is accepted universally as a system whereby: shareholders who own the company appoint or elect directors to monitor and protect their interests in the company and these directors, in turn, retain independent auditors to validate the financial results produced by the company wherein these results serve as a report card on the very performance of the directors as well as management.
In order to function effectively all of the parts must not only work but all of the parts must be in a position to work together. The circle becomes a complete one when: independent auditors validate financial results-shareholders evaluate financial results and board performance and then the board evaluates management performance and issues financial results.
The very mechanisms, as detailed by the Financial Stability Institute [ Bank For International Settlements], entail: assignment of decision making powers; articulating corporate strategy; providing checks and balances; monitoring potential conflicts of interest; developing an incentive structure; fostering interaction between board and senior management; providing an audit structure and setting corporate values and standards. The question remains: to what extent it is followed in our case! Examples are not far to seek/
Basically CV means steering of a ship. It also stands for the art of governing a state. In fact Government refers to the sum of state institutions and laws and thus can be described as the complex of political institutions, laws and customs through which the functioning of the governing is carried out in a specific political event, whereas the governance has a wider focus. In other words this ahs reference to what is done by a Government plus the manner in which power is exercised in the management of a country’s economic and social resources for development.
Whether it is called corporate governance or IT Governance, urban governance or global governance the same refers to informal means of the execution of power plus the decision making process taking place outside of state institutions by business corporation or civil society. Governance occurs at limited economic sector, at various levels as well as for the whole globe. That is why this essentially recognises the power which exists inside and outside the formal authority and institutions of Government and emphasizes the process of decisions made on complex relationship between many actors with different priorities and is thus a reconciliation of these competing priorities which is at the heart of the very concept of governance.
The art of good governance thus calls for devising strategies through which the various actors / stakeholders come together to solve problems, each taking on these issues for which they are well equipped and thus contributing in a constructive way to the very governance of the Institution.
It should not lose sight that Corporate Governance can be effectively and positively influenced by the Government [through laws and regulations]; industry associations; market players; supervisors; securities regulators / stock exchanges and of course the auditors. There are also instances where the Employees’ Union also contributed towards the growth of Institutions through positive suggestions / unearthing the hidden dusts below the carpet and the like. In fact better functioning of any Institution is simply impossible in the absence of cordial employer-employee relations.
The structures, functions, processes and organizational traditions that a board or other decision making body uses must ensure that the mission of the organization is accomplished. CV may be termed as set of rules and procedures that enable an organization to meet its objectives, which, in turn, calls for both efficiency in the matter of allocation of resources and legitimacy in the arena of exercise of the Authority. Shareholders models tend to better efficiency whereas stakeholders models tend to increase legitimacy. However, collective action problems surface when the number of stake holders is large and cost of organizing diverse interests to pursue a common goal is higher as compared to the expected gain [benefits].
The functions of governance are, thus, far from being small. The governing body must exercise strategic directions. Oversight of the management unit that are responsible for day-to-day program management is to be located. Evaluation and audit in the true sense of the term helps ensure well developed governance function.
Consultation with other stakeholders [formal and informal] is a must. Proper coordination should not be a laggard. One common formal method in such a vital context is done through a technical, scientific of professional advisory body. Risk management exercise the most crucial aspect. In most of the cases areas like: reputation risks, fiduciary risks, conflict of interest risks, unfair advantage risks, and non-performance risks paves the way for governance risks.
The significance of CV has thus been felt in recent past by most of the countries and is focussed to address various issues to enhance the returns through increased accountability. CV has actually become the focal point of corporate culture ij the process of day-to-day management. Even SEBI addressed various similar issues to protect the investors.
The modern corporation operates within an ever changing framework of law and is subject to the direct control of the Board of Directors. So, the Board must ensure the law is adhered to while simultaneously ensuring that strategies for long term success are set and implemented. No doubt, doing both successfully can be very difficult to achieve. It is therefore necessary to achieve a balance and alignment among external and internal controls, risk management and competitive behaviour.
The upshot: Corporate Governance focuses on the values, principles, goals and rules that guide the system of power and the mechanisms of management in corporations. Good governance practices seek to maximize shareholder wealth while respecting the rights of other stakeholders and therefore minimizing conflict. Efficient governance also helps to strengthen the company, reinforces competencies to face new levels of complexity, broadens the strategic bases of value creation and harmonizes interests. At the same stroke the proper observance increases investor trust, strengthens capital markets and becomes a factor for economic growth and value generation in as much as it contributes towards less volatile corporate results – via promoting strong viable and competitive corporations in an increasingly fiercely competitive globalised world economy.
Focusing on matters relating to corporate governance such as board size, classification of directors, roles and responsibilities of independent directors, risk management, vigil/whistle blower mechanism, related party transactions, codes of conduct for the Board and senior management, call for top observance at this juncture.
Are the boards really engaging in meaningful selection and evaluation processes rather than ticking boxes ? Actually, many boards have internal evaluations conducted by the chairman or lead director – though these evaluations are well-intentioned, yet directors may be unwilling to disclose perceived weaknesses to the person most responsible for the effective functioning of the board.
So, now a Corporate Governance 2.0 approach would engage an independent third party to design a process for the reviews – the very process would include grading directors on company-specific attributes so that the evaluation stays relevant.
By Dr Mukhopadhyay
Dr Mukhopadhyay, a noted Management Economist, and an International Commentator on Business and Economic Affairs, Director, Netaji Subhas Institute of Business Management, Jharkhand, India, can be reached at [email protected].