Emerging Trends in Corporate Governance
- Dr. G. Malyadi, B. Sudheer Kumar
In the past two years we have experienced a “perfect storm” in the confluence of a stock market bubble, tax laws that favored stock based incentive compensation, increased focus on quarterly earnings and short-term stock market movements, conflicting research reports written by analysts and audits performed by accountants focused on growing their consulting businesses. A failure to address these problems could have indicated a failed system and indeed the U.S. system showed strains, but then it corrected quickly. For the most part, the recent reforms remind us of what we have considered all along to be priorities, including accurate books and records; and fiduciary duties of care, loyalty, and good faith. Reforms in countries and regions as diverse as the United States, the European Union, the Russian Federation, and even India, have a remarkably similar emphasis on director independence, clarification on board and audit committee oversight responsibilities, and management accountability for accurate disclosure. While reform efforts are important, as a practical matter, corporate governance has to be exercised by individuals within a perimeter of ambiguity and discretion that is necessary to foster entrepreneurial activity. In the final analysis, investors all over the world must rely on leading businessmen and women to conduct themselves ethically and honestly in the interests of shareholders.
How to put a check on such corporate evils and how to protect interests of common stakeholders have become matters of serious concern for both the regulators and the government in India especially in view of the government efforts to attract foreign funds and establish investors' confidence in 'Destination India' as an efficient and secured capital market. As a remedial measure, more and more emphasis is being put on good corporate governance and corporate accountability. As such, SEBI too has revised clause 49 of the listing agreement by framing strict corporate governance regulations and introducing the mechanism of independent directors in the board of the company with effect from 1 st January 2006.
According to SEBI guidelines where the chairman of the board is a non-executive director, at least one third of the board; and in case chairman of the board is an executive director, at least half of the board should consist of independent directors. This step by SEBI is considered to be an effective mechanism to reduce potential divergence between corporate management and shareholders. This is so because the independent directors are supposed to function to protect the interest of the minority shareholders by regulating the functioning of the board in an effective and balanced manner so that the promoters and other majority shareholders cannot transact business unethically. Corporate governance is today in sharp focus and the performance of companies on this front is being closely watched the world over. Let the companies create and accumulate wealth legally, ethically and democratize it.
TRENDS IN CORPORATE GOVERNANCE:
Corporate governance deals with laws, procedures, practices and implicit rules that determine a company's ability to take managerial decisions vis-a-vis its claimants in particular, its shareholders, creditors, the state and employees. Corporate governance lays down framework for creating long-term trust between company and its stakeholders. This trust is created by rationalizing and monitoring risk of a company, limiting liability of top management by carefully articulating decision making process, ensuring integrity of financial reports and finally providing a degree of the organization. Today adoption of good corporate governance practices has emerged as an integrated element for doing business. The hyper competitive environment and good corporate governance outcomes have been presented in the diagram. Although the concept and form of corporate governance has been evolving for years, it inherently requires to be continuously nurturing and adopting in the changing business and legal environments.
MOVING TOWARDS EXCELLENCE: A NEW DAWN FOR CORPORATE GOVERNANCE:
From the ashes of recent corporate failures, a new and better model of corporate governance is arriving. A wave of creativity and activism is driven largely by board members with pride and determination to do the job well. Essentials for an effective board include qualities of character, independence, and the ability to work as a group. An important reform is the requirement for a session attended only by independent directors in conjunction with each board meeting. Along with the rest of the board, the audit committee needs to anticipate, oversee, and help address potential risks to the company. Recent rules and regulations though important, must not become a substitute for good judgment in the pursuit of business excellence. The requirement of a director in these troubled and turbulent times is independence, disclosure and transparency, financial literacy, Governance, independent leadership and willingness to say no.
COMPETITIVE ADVANTAGE AND CORPORATEGOVERNANCE:
The first criterion for a high-performing corporate board is having the right people at the
right time whose portfolios of skills are continuously aligned with the company's challenges and who continually earn the right to serve each year without a sense of entitlement. As a result of recent corporate scandals, resulting new legislation and regulations, and increased shareholder activism, high-performing directors are resigning from boards and highperforming executives are limiting their board memberships. To overcome these unfavorable trends, boards must follow a rigorous process that includes establishing a governance committee, creating a board succession framework, matching required skills to current board members, creating an ideal board candidate profile, and establishing a candidate search-and-identification process.
THE EMERGENCE OF CORPORATE GOVERNANCE OFFICER:
As a result of recent corporate scandals and related reforms, a growing number of companies now have corporate governance officers (CGO). While the CGO may fit into a number of places in the corporate organization chart, the optimum position is likely to be that of corporate secretary, or at least in the corporate secretary's department. More important is that the CGO's formal reporting structure is the “tone at the top” stemming from board and management support for good governance and the CGO's role in implementing it. The CGO's principal responsibilities can be broken down into three areas(1) developing and assisting in the implementation of governance policies systems, and practices; (2) engaging in internal and external communications regarding governance; and (3) implementing continuous improvement in governance.
SIZE STRUCTURE AND COMPOSITION:
Greater attention will be paid to the board's size structure and composition. Emphasis will center on the proper board size needed to oversee the organization's affairs, the benefits of a diverse board membership, the independence of board and committee members, and the impact of constituent representation. The advancing maturity of the traditional “holding company” corporate structure
model will require boards to revisit organizational configuration. The attraction of “Systemness” and related concepts must be balanced against the need to preserve board oversight, satisfy regulatory requirements concerning tax exempt status and protect against “piercing the veil” – type corporate liability.
RISK MANAGEMENT AND CORPORATE GOVERNANCE
Clause 49 of the listing agreement intends to protect the interest of the stakeholders through good corporate governance practices and disclosures. These procedures should be periodically reviewed to ensure that management controls risk through means of a periodically defined framework. Risk management, therefore, is a critical component of corporate governance. While the need for risk assessment and management thereof is fast becoming an area of disclosure in the report of board of directors, most Indian companies view risk management to minimize the losses rather than looking as a comprehensive approach for maximizing shareholder wealth.
Since risk taking is intrinsic to business growth, all business organizations face risks either from internal operations or from external environment. The basis of any business is a healthy appetite for risk. This is why one of the greatest and most important challenges for CEOs and CFOs is to define the optimal risk level for their business to ensure that the activities of the organization produce risk-adjusted returns, even when organizations are good at identifying various risks they face, they often make mistakes in dealing with these risks in piecemeal manner or they do not consider all options availabe to deal with the risks.
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