Corporate governance: Grit and grace

Dr B K Mukhopadhyay

(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

A couple of years ago, John Wilcox [Chairman, Morrow Sodali] opined,"I think much more can be done with board evaluations…The board evaluation process, which is traditionally a very internalized one that is closed and private, could be much more valuable if done from the perspective of other constituencies that the board represents… Shareholders would be at the top of the list, but you'd also look at customers, suppliers, communities and other groups, including looking from an ESG focus."

It is well known a fact today that Governance refers to promoting strong viable and competitive corporations in anincreasingly fiercely competitive globalized world economy. The complex and evolving changes in thecorporate behavioural pattern as well as shifts of economy have, undoubtedly, posed great difficulty not only to the domestic but to cross-boundary jurisdiction owing to the interplay of a number of reasons – especially emanating from movement of funds and consequent protection of investors' interest. Equally, the existence of weak coherence in different politico-legal systems, which actually has posed difficulties in the arena of business risks management environment. At the same time, the very requirement is there to safeguard in the arena of appropriate parking of funds for returns in the event of diluted control of the shareholders.

So far as norms related to governance of domestic and Transnational Companiesare concerned, the hindrances exist via disparity and non-conformity of corporate legal system. That is why this is high time to focus attention on the diverse issues arising on this score so as to evolve common accepted norms of corporate governance. And in doing so the arena to be kept in view is a multi-dimensional one–political power and corporate control; stakeholders' role vis-à-vis sustainable development; reassessment of the very codes related to corporate 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.

Corporate Governance 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, 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.

Additionally, Corporate Governance (CG, hereafter) 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 corporate Governance is to build and strengthen: accountability; credibility; transparency; integrity and of course trust. CG 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. That is why appropriate governance practices protect: shareholders; customers; public in general; supervisors and the very employees.

The OECD views that CG "…relates to the internal means by which corporations are operated and controlled". In 1992, the Cadbury Report 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.

That is to say 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 structures, functions, processes and organizational traditions that a board or other decision-making body uses must ensure that the mission of the organization isaccomplished. CG 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. Shareholder models tend to better efficiency whereas stakeholder 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.

The core 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!

Consultation with other stakeholders is a must. One common formal method in such a vital context is done through a technical, scientific professional advisory body. Risk management exercise is 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 pave the way for governance risks.

It is also a point to note that regulatory compliance mechanisms remain widely diversified so far as legal systems are concerned. It has rightly been observed that these domestic legal systems develop out of historical pull factors and remain based on culture; customs and usage of any society and that similar type of concepts get applied on corporate legal systems. The functions of governance are, thus, far from being small. The governing body must exercise strategic directions.

Oversight of the management unit that is 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.

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 recognize 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 are conciliation of these competing priorities which is at the heart of the very concept of governance.

It is good to note that the IFC [International Finance Corporation, a member of the World Bank], has been doing a commendable job in many places. The Indian case is interesting to see. For example, she joined hands with CII [Confederation of Indian Industries] to expand the reach of a training programme that could help strengthen India's corporate governance. The IFC has been tailoring, through its Corporate Governance Forum, the training programme to the Indian market and has been working very closely with partners on the implementation plan. NSIM [National Institute of Securities Marketing] along with the IFC targets to reach the key players in the field of corporate governance that takes within its fold the Directors, Practitioners, Academics as well as the media. On the part of the CII the task is to provide access to its vast network of industrial and corporate communities. Seems consequential, going ahead.

Upshot: from hedge fund activism to board refreshment, corporate governance is very much front and centre in today's business world.