CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Written by CA Ankita Agrawal

INTRODUCTION:

In ancient times, there were “Manusmritis” and various other manuscripts which contained the code of principles as to what is right or wrong. These were used to govern the laws and regulations in those times. Different empires used their very own tailor-made codes of conduct for their kingdoms extracting basic information & rules from the whole manuscripts written by the respected “Rishi-munis”. Thus, there was a rule book kind of thing present which used to dictate the relationship between “Raja” & his “Praja”.

Corporate governance, on these similar lines, is the mechanism through which today’s corporations are managed and controlled in a way beneficial to all the stakeholders, thereby leading us all towards the advancement of that particular organisation & thereby the whole economy. The organisations following these corporate governance principles benefit tremendously in the form of increased consumer trust, goodwill among industry, rising consumer satisfaction, good relations with suppliers & creditors & most importantly creating value for its shareholders.

The Securities and Exchange Board of India (SEBI) Committee on Corporate Governance defines the term as the “acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and their role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct & making a distinction between personal & corporate funds in the management of a company”.

Governance structures function to identify the roles & responsibilities of a corporate and distribute those with matching rights & authorities amongst all its stakeholders including Board of Directors, managers, regulators, suppliers, creditors, employees & all other stakeholders. These mechanisms include, but are not limited to the processes & procedures for making any decision at the corporate level. Corporate governance is primarily required to manage the conflicts of interest arising in the day to day functioning of corporates.

MAIN PRINCIPLES GOVERNING THE CORPORATE GOVERNANCE:

  1. ETHICS – The first & the most important principle governing the corporate governance structure is the values & ethics of the organisation. The level of ethics an individual possesses goes a long way in developing the code of conduct & his social, cultural & organisational behaviour. Employees, the greatest resource in any & every organisation is highly influenced by the level of ethically governed policies & principles of his/her corporation.
  2. PERSONAL INTEGRITY & ACTION – The top-level management generally formulates the rules of corporate governance, of course in line with the regulator’s guidelines. Hence, the personal integrity & core values of those in action play a great role in the success of corporate governance policy. Managers can demonstrate the policies on the ground that speaks about the company’s stated policies.
  3. COMMITMENT TO STAKEHOLDERS – Organisation’s basic purpose is to create value addition for its shareholders along with the satisfaction of its customers & employees. The corporate governance policies should be formulated in accordance with the above. The corporate should be able to treat all its stakeholders fairly, be it shareholders who are in effect the true owners of the company, or the customers who are the king, or the suppliers who provide essential supplies to the organisation or the regulator who is the policymaker for the benefits of the industry.
  4. TRANSPARENT DEALING – Any corporate should be transparent in its dealing with the whole ecosystem of stakeholders. The policies should be such that even in case of any loss, the entity’s employees should feel comfortable in willing to be accountable for their actions & mistakes. Failures should be treated as stepping stones to success.
  5. WALK THE TALK – Leadership team of the organisation needs to walk the talk regarding the corporate governance procedures & policies. Just like a child learns looking at his parents, similarly, the employees learn & get influenced by their leaders. Corporate governance should not just become a code of conduct on paper but also in substance.

Corporate governance is about doing the right thing in the right way at the right time. It is not a written book on the codes governing an entity which could be passed across organisations. Instead, corporate governance is continuously evolving along with the growth of a corporate depending on which stage the company is in. For example, a startup which just came into existence may require just a basic governance model, unlike an entity which is into existence from a decade. People & organisations learn from their experiences & therefore, depending on the situations dealt within its life span, corporate governance models & structures often undergoes modifications continuously.

Moreover, the corporate governance structures also depend upon the goals, strategies, risk-taking appetite, mission, vision, competency of its leadership team, etc. So, it is highly recommended that while setting up & formulating a corporate governance policy, the above needs to be taken into consideration by the policymakers. Also, these governance structures differ dramatically depending on the business entity is involved in & the experience its leadership team has. It also is dependent on the cultural background & sensitivity of policymakers.

CORPORATE GOVERNANCE POLICY IN TIMES OF COVID:

            We all are trapped in a situation of lockdowns, slower or negative economic growth due to this global pandemic of Covid-19. These are once in a lifetime issues which nobody would anticipate in advance. These tough times are a real test of an organisation’s policies & practices. How an organisation reacts in stress or COVID-like situation speaks volumes of its mechanisms & code of conduct.

            A corporate governance policy must be already in place to deal with real-time issues. For example, when a flight gets into turbulence mid-air, the infrastructure such as seat belts, oxygen masks, emergency exits, etc. are needed to be already in place. One cannot afford to develop such infrastructure if & when the need arises. The point is one cannot search for policies in times of urgent need. One needs to build & develop policies & frameworks when the flight aka entity is in proper operational condition.

            These times are fiercely tough for most of the organisations. It has resulted in the financial as well as a mental drain to almost every entity. In the middle of this crisis, the survival of any corporation is of utmost importance. Even though we all are sailing in the same boat, the investors of any organisation would have almost similar expectations from their company as they were having in pre – COVID times. So, in these circumstances, certain modifications in the existing corporate governance policy are certainly required. Some of these mandatory changes

are listed below:

  1. The overall business continuity & going concerned must be assessed while preparing the financial statements & the most realistic numbers, in particular, the cash flow statement must be reported. The organisation must commit itself to & display its ability to keep its operations going as long as possible. For investors too, they must try to assess & catch up on the early signs of an organisation’s ability to continue with its operations & take actions accordingly.
  2. The Board must be kept fully involved & informed about the daily routine activities, emerging risks, ability or disability to honour a contract, ability to serve customers, change in government guidelines, receivables risk (if any), etc. along with those mentioned originally in the corporate governance policy of the organisation.
  3. The approval mechanisms must be evolved to urgently act on any short term liquidity crunch the company might face in these times. Also, in accordance with the current needs of the organisation, policies on management & conservation of capital must be reviewed periodically.
  4. The corporation must formulate & keep policies in place for cyber risks & data privacy as most of the organisations are shifting towards the “Work from home” patterns. Also, information technology systems up-gradation, protocols of data distribution & sharing must be secured. The entity should also ensure protection from hacking & data theft or leakage.

Some organisations inculcate a top-down approach of management & governance so that top-level management be aware of all kinds of threats to their business & possibly to devise a solution to the same. These structures must be reviewed from time to time & be mod

ified as per the needs.

RISKS & CORPORATE GOVERNANCE:

            Every organisation in this world is subjected to many kinds of risks while doing business; primarily among them are regulatory, operational & technology risks. Regulatory risk is the risk which an organisation faces when rules & regulations changes which hampers its way of functioning. For example, any environmental protection law enacted recently which impacts the very business of the company. Operational risk is any threat posed to the operations of the entity just like this COVID world has drastically impacted the operations of most of the companies. Technology risks are the ones in which the company’s products/services become obsolete due to technology upgradation.

An organisation becomes immune to risks only when its internal policies & structures are in place. The corporate governance structure acts as a shield in this case & protects the organisation from the attacks of various risks. Corporate governance is not an optional subject to follow only in conditions of threat from any kind of risk; instead, it’s a must for any corporation.

In the long term, if the governance structures are duly managed, it starts to impacts an entity to become agile & to manage to earn rewards for its investors. For example, bankers want more money as deposits & want to extend more loans to its clients; whereas, in case of equity holders, they look towards the price – earning multiple & value addition to their wealth. In order to be prepared for any risk, the organisation should use the SSS approach, which is:

  1. Stress testing – Early identification of a potential risk & doing SWOT (Strengths, weaknesses, opportunities & threats) analysis in order to prepare the entity for the risk, for example, even before World Health Organisation announced coronavirus as a pandemic, there were early signs warning the businesses of the potential threat to business due to virus. The companies which acted proactively and identified the risk to their business definitely benefitted.
  2. Sensitivity analysis – It implies finding out how sensitive is one’s business to a particular factor & if any changes happen to that factor then what will be its implications on the business of the entity.
  3. Scenario modelling – This means testing business on a particular scenario & monitoring how would the business play out in a particular scenario. For example, if a competitor launches a similar product as the company’s, what would its impact on the company’s sales & customer base.

HANDLING CONFLICTS OF INTEREST:

            One of the basic purposes of setting up corporate governance policies is to ensure that any conflict of interest is properly dealt with, without impacting the benefits of stakeholders. Conflicts typically arise when two or more involved parties have opposing opinions on the way business should be conducted. Handling the conflicts between profit maximization & following corporate governance policy framework is one of the most common of the conflicts. Corporate governance policies determine whether one can or cannot go out of the way to solve a customer’s problem. For example, in case of the insurance business, in case of any mishap, they can either hide behind the complicated terms & conditions of the policy & refrain from passing the claims or can act ethically to help the client in need.

            Another possible conflict is in case of acting appropriately if any complaint of whistleblowing is received by the company. Whistleblowing mechanism implementation is an integral element of corporate governance policy. An entity needs to inculcate this mechanism within its policy & also just having this code on paper isn’t enough. The leadership team also needs to have the courage to address the complaints received & also should be able to encourage their employees to strictly adhere to norms specified in the stated policy.

CONCLUSION:

            Corporate governance has been receiving increased attention nowadays because of the high profile scandals involving abuse of corporate authority & power or alleged criminal activity by corporate officers. It is therefore of very high significance that corporate governance is taken seriously by all the persons including but not limited to the Board of Directors, Presidents, Vice Presidents, Managers, Team Leaders, Supervisors and all the employees.

            Only when good governance practices are in place that the company runs effectively and efficiently and is able to generate value for its shareholders.

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