Changing corporate governance practices
Wednesday, June 23, 2021 5:52 PM

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The start of this century was marked by an emphasis on corporate governance, which leapt to global business limelight from relative obscurity after a string of collapses of several high-profile companies.

The business world was shocked with both the scale and age of unethical and illegal operations. Ever since, the need for adoption of good corporate governance principles has only got reinforced from time to time, but inevitably and inextricably, efforts to this end have gathered further momentum each time a new corporate scandal has come to light. And India is no exception to this phenomenon.

Events of last year involving an Indian technology major, have prompted several questions and various forms of introspections on corporate governance practices, as well as brought focus on aspects relating to disciples exercised by the dominant shareholder, accountability of the management, role of the auditors (external and internal), functioning of the board and audit committee and also the value of ethical conduct in business.

The current focus

The spotlight is now firmly on key aspects of the governance framework, with particular emphasis on the audit and finance functions which have a legal, moral and ethical responsibility to identify and disclose aspects of a promoter-driven agenda that have the potential to impact the interests of other stakeholders adversely.

Business ethics

In business ethics, what was good is becoming bad and what was considered bad is now good. Standards for corporate governance that have worked for decades are looking old fashioned or immoral, while other practices that raised questions are now becoming totally acceptable. Debates, discussions and reviews on corporate governance have predominantly focused on large, listed and high profile companies with dispersed shareholdings and there is an impending need to expand the net, in recognition of the impact of issues relating to financial transparency, the role of access to outside capital and conflict resolution, to non-listed and family-controlled companies. These today are considered a crucial component of the growth engine for the Indian economy.

While analysing corporate governance in public sector units (PSUs), the considerations that often come up relate to the perceptions on the overregulation of PSUs in India, which, on one hand, are accountable to various authorities under several regulations, including Parliament, the Comptroller and Auditor General of India, the Central Vigilance Commission and the Right to Information Act, and, on the other, are susceptible to bureaucratic hurdles.

Good governance has been further augmented in the past few years by a rise in the recognition of corporate social responsibility (CSR). This is based on an understanding of the expectations that our communities have regarding the ‘social contract' that organisations have with communities. This may include public reporting, openness to input, access points for complaints about services or tips regarding illegal actions of employees.

CSR programmes

Corporate governance and CSR are both extremely important to an organisation. But it is not a natural thing to separate the two. If an organisation has a well formed governance programme in place, the same would possibly also take care of most of the social issues. Organisations are increasingly focusing on the impact of their business activity on society and in doing so many have created CSR programmes to balance their operations. Taking responsibility for its impact on society means in the first instance that an organisation accounts for its actions and the effect of the same on particular interests groups within the society.

In today's globalised, interconnected and competitive world, the way that environmental, social and corporate governance issues are managed is a part of the organisation's overall management philosophy to compete successfully. Organisations that perform better with regard to these issues can increase shareholder value by properly managing risks, anticipating regulatory action or accessing new markets while, at the same time, contributing to the sustainable development of the societies in which they operate.

Sustainable value also emanates from an organisation's ability to adhere with a corporate culture of conscience and consciousness, transparency and openness, fairness and accountability, propriety and equity. Certain combinations of governance mechanism may work for certain periods of time. Change, however, will inevitably occur.

Implementation issue

Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level. More needs to be done to ensure adequate corporate governance in the average Indian company. Further, even the most prudent norms can be hoodwinked in a system plagued with widespread corruption.

Nevertheless, with the successful turnaround of Satyam (NYSE:SAY) with the commendable and active support of the Government (which itself took swift and planned action, at the same time exercising considered restrain wherever required instead) and with industry organisations and chambers of commerce themselves pushing for an improved corporate governance system, the future of corporate governance in India promises to be distinctly better than the past.

(The author is, Executive Director, Mazars.)



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