Better corporate governance: A must for bolstering business

B K Mukhopadhyay | Published: March 03, 2019 21:20:59 | Updated: March 06, 2019 21:31:58

Couple of years back John Wilcox [Chairman, Morrow Sodali] nicely opined : 'I think much more can be done with board evaluations. The board evaluation process, which is traditionally a much internalised one, 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.'

It is well known a fact today that governance refers to promoting strong viable and competitive corporations in an increasingly competitive globalised world economy. If the current trends of business events are of any indication, the fact emerges that rapid changes in the corporate behavioural pattern as well as shifts of economy have, no doubt, posed great difficulty not only to the domestic but to cross-boundary jurisdictions owing to the interplay of a number of factors - especially emanating from movement of funds and consequent protection of investors' interest. No less important is the existence of weak coherence in different politico-legal systems, which actually has posed difficulties in the arena of business risks management. At the same time, the very requirement is there to safeguard the arena of appropriate parking of funds for returns in the event of diluted control of the shareholders.

So far as the norms related to governance of domestic and Trans National Companies are 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 commonly 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, and reassessment of the very codes related to corporate governance.

The art of good governance thus calls for devising strategies through which 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.

It should not be lost sight that corporate governance (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 and the like. In fact, better functioning of any institution is simply impossible in the absence of cordial employer-employee relations.

Basically, CG 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 governing 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.

In fact corporate governance is a process and structure that is used to: direct and manage business and 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.

That is why, appropriate governance practices protect the shareholders, customers, public in general, supervisors and the very employees. OECD has nicely furnished the 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.

That is to say, in order to function effectively all of these parts must not only work but 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 organisational traditions that a board or other decision making body uses must ensure that the mission of the organisation is accomplished.

Proper coordination should not be a laggard. One common formal method in such a vital context is done through a technical, scientific of 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.

There is no doubt that these types of business decision makings sail through the management skills and prudence within the given framework (regulators' law). 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 practices of a society and that similar type of concepts get applied to 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 true sense of the term helps ensure well developed governance function.

Governance occurs at limited economic sectors, at various levels as well as for the whole globe. That is why, it essentially recognises the power which exists inside and outside the formal authority and institutions of government and emphasises the process of decisions made on complex relationships among 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.

Dr. B K Mukhopadhyay is a Management Economist.  m.bibhas@gmail.com


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