Are the boards really engaging in meaningful selection and evaluation processes rather than ticking boxes? Though many boards have internal evaluations conducted by chairmen or lead directors and 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 boards!
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.
Reflecting the Importance
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.
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.
Indian Example
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 capitalization.
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. While India is making all the right moves in the Companies’ Act around independent directors, a lot more responsibility needs to be fixed.
No doubt: the significance of CV has thus been felt in recent past by most of the countries and is focused to address various issues to enhance the returns through increased accountability. CV has actually become the focal point of corporate culture is the process of day-to-day management. Even SEBI addressed various similar issues to protect the investors.
Still the gaps exist and bridging the gap is essential at this juncture!
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 corporations 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.
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.
In Lieu of Conclusion
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 bodies use 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 stakeholders is large and cost of organizing diverse interests to pursue a common goal is higher as compared to the expected gain [benefits].
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 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 programme management is to be located. Evaluation and audit in the true sense of the term helps ensure well developed governance function.
Corporate governance has to 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 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 inasmuch as it contributes towards less volatile corporate results - via promoting strong viable and competitive corporations in an increasingly fiercely competitive globalised world economy.
Corporate Governance [CG] will continue to be 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.
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.
Dr BK Mukhopadhyay
A noted management economist and an international commentator on business and economic affairs.
He may be reached at m.bibhas@gmail.com