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Corporate governce: Principles, practices & reality

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  2 Jun 2015 12:00 AM GMT

Dr B K Mukhopadhyay

Arecent report by Grant Thornton assessed that corporate governce 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, with provisions like having a whistle blower mechanism has been widely accepted by India Inc, having a woman 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 Governce Services, an authority on corporate governce 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 governce 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 governce 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 trainers for one of the tiol level banking training centres the most eligible, highly qualified [having Doctorate degree] and experienced candidate possessing exposures in the tiol and intertiol level was shown the gate for reasons 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!

Are the boards really engaging in meaningful selection and evaluation processes rather than ticking boxes? Actually, many boards have interl 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 Governce 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.

Any deviation located must face stern action so as to wipe out such a practise from new and emerging India! Partiality, nepotism and rrow 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 governce mechanism cause losses in public enterprises – so the culprits should not be spared!

Added to this the well known approach clarifies that ‘direct evaluations would be shared with the directiors 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 dymics. 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 governce 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, magement, shareholders to customers, employees and society.

The very mechanisms, as detailed by the Fincial Stability Institute [Bank For Intertiol 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 magement; 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 governce 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 magement of a country’s economic and social resources for development.

Whether it is called corporate governce or IT Governce, urban governce or global governce; 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. Governce occurs at limited economic sectors, 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 governce.

The art of good governce 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 governce of the Institution.

The structures, functions, processes and the organizatiol traditions that a board or other decision making bodies use must ensure that the mission of the organization is accomplished. The functions of governce are, thus, far from being small.

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 that the law is adhered to while simultaneously ensuring that strategies for long term success are set and implemented. There is no doubt that doing both successfully can be very difficult to achieve. It is therefore necessary to achieve a balance and alignment among exterl and interl controls, risk magement and competitive behaviour.

In fact Corporate Governce should be regarded as a process and structure that is used to: direct and mage business; enhance shareholders’ value as well as ensure fincial viability. In a word the very purpose of Governce is to build and strengthen: accountability; credibility; transparency; integrity and of course trust. That is why appropriate governce practises protect: shareholders; customers; public in general; supervisors and the very employees.

The upshot: CV focuses on the values, principles, goals and rules that guide the system of power and the mechanisms of magement in corporations. Good governce practices seek to maximize shareholder wealth while respecting the rights of other stakeholders and therefore minimizing conflict. Efficient governce 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 governce such as board size, classification of directors, roles and responsibilities of independent directors, risk magement, vigil/whistle blower mechanism, related party transactions, codes of conduct for the Board and senior magement, call for top observance at this juncture.

(The Writer, a noted Magement Economist and an Intertiol Commentator on contemporary business and economic affairs, attached to The West Bengal State University, can be reached at m.bibhas@gmail.com)

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