Defining corporate governance

Human behaviour determines the implementation and the underlying purpose and process of governance

The common assumption is that the supposedly simple term, corporate governance, should be common knowledge. But often when during my talks to audiences which generally comprised chief experience officer (CXOs), company secretaries, chartered accountants and other professionals, I have asked what is their understanding of corporate governance, their responses have been varied.

The predicament of the term is somewhat like the word “wealth”. In the preface to his book Principles of Political Economy, John Stuart Mill writes, “Everyone has a notion, sufficiently correct for common purposes, of what is meant by wealth”, and yet he observes in the same breath that there is a “(mischievous) confusion of ideas” on so simple a question as what is to be considered as wealth. While it is no part of my design to aim at a metaphysical nicety of definition, a definition nevertheless is necessary for a basis of developing a sound understanding of a subject.

Reduced to its bare essentials, corporate governance would mean the governance of companies. The need for “governance” of joint stock companies has been felt ever since businesses were organised in a corporate form, but the term “corporate governance” perhaps came into formal reckoning in the proceedings brought by the United States Securities Exchange Commission (US SEC) against three outside directors of a a widely diversified railway corporation, Penn Central.

The word “governance” underpins the term corporate governance, so it is important to delve a little into the concept of governance. For centuries, both in the East and the West, governance has been associated with the duties and the right actions of the kings and rulers, and the governance of the kingdoms, states, provincialities, societies and institutions established by religions and the states. The Latin root of the English word governance is gubernare means to steer. The Greek origin of the Latin word gubernare is kuberna. Plato, describing the action of governing men, had used the term kubernáo to mean directing towards a specific goal.

The West has thus associated “governance” with a sense of piloting, steering or directing and oversight and this explicates why this e sense of directing and oversight got naturally attested to the meaning of the word governance and ruled the modern day interpretation of “corporate governance”. The perspective of governance from Indian history has been somewhat different — dharma( or dhamma) formed the guiding principles of the reign of a king who is the trustee of the wealth and welfare of the subjects, and wisdom and virtuousness are his strengths.

Adrian Cadbury observes in the introduction to the book The Genesis of Corporate Governance, that “governance is a word with a pedigree that dates back to Chaucer and in his day (especially in the play Troilus and Criseyde) the word carried with it the connotation wise and responsible, which is appropriate. It means either the action or the method of governing and it is in that latter sense that it is used with reference to companies. Its Latin root, gubernare means to steer…”

The Indian Companies Act 2013 does not define this term, though the accoutrements which help establish the standards of corporate governance in a company, are described in full regalia in the Act. This I thought was interesting, if not curious.

The Cadbury Committee describes corporate governance as the mechanisms, processes and relations by which corporations are controlled and directed. We often make the common mistake of laying too much emphasis on the former and ignoring the latter. This has also another danger. The company may only be juridical person, but it functions with the help of people and it is ultimately human behaviour which determines how the mechanisms and process function and the underlying purpose for such mechanisms, namely, control and direction, is served.

When the baser human emotions take control and the decision makers act in the strength or the weakness of their own egoism, self- deceit, hypocrisy and vain self-flattery, success becomes illusory and much labour goes to the making of a little result and the blow comes to cast them down in the midst of their triumph.

I end the piece with Alice’s song in Disney’s Alice In Wonderland:

“I give myself very good advice/But I very seldom follow it/That explains the trouble that I’m always in.

Well I went along my merry way/And I never stopped to reason/I should have known there’d be a price to pay/Someday, someday.”

Alice was lamenting why she was not careful enough, otherwise she would not have fallen down the rabbit hole.