Better corporate governance system paves the way for better business returns;

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)

It is heartening to note that corporate governance [CG] has been becoming increasingly important in the world of business, across the public sector, non-profits, education, healthcare, and PLCs, recognising the fact that there are many responsibilities associated with corporate governance, even though they vary from company to company, reflecting reality.

The very purpose

The OECD has nicely furnished the definition: Corporate governance relates to the internal means by which corporations are operated and controlled. The Cadbury Report, 1992, nicely describes the system by which companies are directed and controlled.

The purpose of corporate governance, according to the FRC, UK, is “to facilitate effective, entrepreneurial, and prudent management that can deliver the long-term success of the company”.

It is quite clear that a CV is about what the board of a company does and how it sets the values of the company. Thus, it is to be distinguished from the day-to-day operational management of the company by full-time executives. Its role is about effectively supervising the management of a company to uphold the company’s integrity, achieve more open and rigorous procedures, and, of course, ensure legal compliance, so that even in the near future, public opinion regarding the company will improve and thus profitability.

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.

Tasks Specific, Continuous

and Spontaneous Indeed

CV calls for implementing tasks like formulating as well as implementing the organisation’s strategy, leadership qualities essential for the same, and to what extent the overall management of the organisation performs in the arena of promoting and ensuring good relations with stakeholders, shareholders, and employees, and finally reporting back to the board or shareholders covering these...

In fact, corporate governance [CG] is a process and structure that are used to: direct and manage business; enhance shareholders’ value; and 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. That is why appropriate governance practices protect shareholders, customers, the public in general, supervisors, and even employees.

In order to function effectively, all of the parts must not only work, but also be in a position to work together. The circle is complete when: independent auditors validate financial results; shareholders evaluate financial results and board performance; and then the board evaluates management performance and issues financial results.

On this score, it is better to remember the analyses of the Financial Stability Institute [Bank for International Settlements] that entail: the assignment of decision-making powers; articulating corporate strategy; providing checks and balances; monitoring potential conflicts of interest; developing an incentive structure; fostering interaction between the board and senior management; providing an audit structure; and setting corporate values and standards.

Basically, CV means steering 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 government is carried out in a specific political event, whereas governance has a wider focus. In other words, this has 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, 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 in limited economic sectors at various levels as well as around the globe. That is why this essentially recognises the power that exists inside and outside the formal authority and institutions of government and emphasises the process of decisions made on complex relationships between many actors with different priorities. It is thus a reconciliation of these competing priorities, which is at the heart of the very concept of governance.

Saluting Good Governance

The art of good governance thus calls for devising strategies through which the various actors and stakeholders come together to solve problems, each taking on issues for which they are well equipped and thus contributing in a constructive way to the very governance of the institution.

It should not be lost 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 to the growth of institutions through positive suggestions, unearthing hidden dust below the carpet, and the like. In fact, the better functioning of any institution is simply impossible in the absence of cordial employer-employee relations.

The structures, functions, processes, and organisational traditions that a board or other decision-making body uses must ensure that the mission of the organisation is accomplished. CV may be termed a set of rules and procedures that enable an organisation to meet its objectives, which, in turn, calls for both efficiency in the matter of the allocation of resources and legitimacy in the arena of the exercise of authority. Shareholder models tend to improve efficiency, whereas stakeholder models tend to increase legitimacy. However, collective action problems surface when the number of stakeholder groups is large and the cost of organising diverse interests to pursue a common goal is higher as compared to the expected gains.

The functions of governance are, thus, far from being small. The governing body must exercise strategic direction. Oversight of the management unit that is responsible for day-to-day programme management is to be located. Evaluation and auditing in the true sense of the term help ensure a 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 through a technical, scientific, or professional advisory body. Risk management is the most crucial aspect. In most cases, areas like reputational risks, fiduciary risks, conflict of interest risks, unfair advantage risks, and non-performance risks pave the way for governance risks.

The significance of CV has, thus, been felt in the recent past by most of the countries and is focused on addressing various issues to enhance returns through increased accountability. CV has actually become the focal point of corporate culture in the process of day-to-day management. Even SEBI addressed various similar issues to protect investors.

More specifically, governance is to promote strong, viable, and competitive corporations in an increasingly fiercely competitive globalised world economy.

Research specialist Evie Lee nicely pointed out that for a better-looking CV, the tasks can be subdivided into broad categories: accountability, efficiency, and effectiveness; fairness, responsibility; transparency; and independence of the board so that decision-making is objective and fair.

We must be aware of the effects of bad corporate governance; it can be devastating for an organisation. Poor corporate governance can lead to issues like corruption, negligence, fraud, and a lack of accountability, among others. Inadequate control and strategic alignment can land the company in a bottomless pit, losing shareholder confidence and trust. Damaging trust in the company is never desired; that is obvious enough.

It will not be out of place to mention that cooperation and learning from international bodies could well lead to better results. As a ready reference, we can recapitulate the role of the IFC [International Finance Corporation, a member of the World Bank] in the arena of expanding the reach of training programmes that could help strengthen corporate governance. The IFC has been tailoring, through its Corporate Governance Forum, training programmes to the markets and has already been working very closely with partners on the implementation plan.