Emerg­ing Trends in Cor­po­rate Gov­er­nance

- Dr. G. Malyadi, B. Sudheer Kumar

Economic Challenger - - NEWS - * Dr. G. Malyadri, **B. Sudheer Kumar * As­so­ciate Pro­fes­sor, Dept of MBA, Sreeni­vasa In­sti­tute of Tech­nol­ogy and Man­age­ment Stud­ies (SITAMS), Chit­toor, A.P. email: -drgmalyadri.10, Mo­bile No: 09440562337. **As­sis­tant Pro­fes­sor, Dept of MBA, Sreeni­vasa In


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.


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.


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.


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.


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.


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.


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.

REF­ER­ENCES 1. David Fred R., Strate­gic Man­age­ment: Con­cepts and Cases. Pren­tice –Hall of In­dia Pvt.Ltd. New Delhi, 2005. 2. Dr. Chakravarthi . P.K., 'Role of In­de­pen­dent Di­rec­tors – A Myth or Re­al­ity; The Charted Ac­count., June, 2007. 3. CA. Gag­ger B.L., Cor­po­rate Gov­er­nance & Risk Man­age­ment., the Charted Ac­coun­tant., May, 2007. 4. Lavi Mo­han R. , Global Ac­count­ing Stan­dards? The Hindu Busi­ness line, July 5, 2007. 5. Prof. Sri­vas­tava R.M., Man­age­ment Pol­icy and Strate­gic Man­age­ment; Con­cepts Skills and Prac­tices., Hi­malaya Pub­lish­ing House Mum­bai, 2005. 6. CA. Narang K.C., Cor­po­rate Gov­er­nance in Pri­vate Com­pa­nies., The Charted Ac­count, May, 2007. 7. Cherunilam Fran­cis, Strate­gic Man­age­ment., Hi­malaya Pub­lish­ing House, Mum­bai-2004. 8. Chat­ter­jee Moumita Bak­shi, Kulka­rni Vish­w­nath, Top IT Ex­ec­u­tives en­joy 20-90% pay hikes in FY07., the Hindu Busi­ness Line,

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