Corporate governance needs to be discussed

Corporate governance needs to be discussed

Corporate governance, like democracy, will always be a work in progress. There is no perfect state, but only an ideal one.

Srinath SridharanUpdated: Wednesday, October 19, 2022, 08:29 AM IST
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Representative Image | Pixabay

Corporate governance is about the accountability of the board of directors towards all the stakeholders of the company — shareholders, employees, suppliers, customers, consumers and society in general. The fundamental idea of corporate governance is to ensure the conditions whereby the organisation’s directors and key managers act in the interest of the organisation and its stakeholders, and to ensure the means by which managers are held accountable to capital providers for the use of assets. Corporate governance issues range across business ethics, corporate culture that shapes how a company functions and its organisational practices, the board’s engagement and impact, enterprise risk framework and granularity of the organisation disclosures, amongst many other behavioural aspects.

Corporate governance, like democracy, will always be a work in progress. There is no perfect state, but only an ideal one. There will be always some hits and misses. This is where the challenge arises, of how soon will it progress, if at all. Who will demand any changes? What will determine the pace of change? Who arbitrates on these? Who moderates any debate, discourse or narrative? No ideal form exists even today and efforts always would be to keep improving the dynamics, the systems and the interplay between different participants in the process. The only test is if it serves stakeholder interests.

This is where governance regulators are expected to deliver fairness of ideology, transparency and robustness of their processes, and the speed of decisioning, when any breach occurs. Regulators are expected to be firm in their ideology, and not waver to industry lobbies or pressure. After all, if regulators can’t stand up to such pressure in the name of governance, how can they expect industry to stay true to governance in light of their capitalistic pressures?

Mandemic & manels — the malaise

The very phrase ‘board of directors’ evokes imagery that is wreathed in gender as well as age bias. The reality of India Inc is that we are a long way away from delivering equality of gender representation. Even the regulatory ask of women directors on boards of large entities has been grudgingly met, as if there is shortage of women experts. For a nation that celebrates Maa Shakti, we pretend that they don’t exist in the corporate world.

As far our boards are concerned, even before pandemic, we have had only a mandemic. Hopefully the Corporate India ‘mandemic’ will be resolved consciously. The same behaviour is demonstrated in the various conferences and panel discussions that happen in the nation, where panels are filled with men participation. Sadly gender equality is still just a narrative, an affirmative action point. (Young) Age is still a barrier to boardrooms. (Older) Age has been wrongly looked up as a upholder of good values, morality and ethics.

Nuts & bolts

Boards have a tough job, if one goes by the long list of governance regulations, statutory compliance and the accountability that they are expected to carry along. If one goes by the seriousness and the length of board agendas and the true spirit of discussions happen, those meetings would be expected to be serious and long-winded discussions, before they arrive at a decision to help the enterprise. But most of the boards seem to be bogged down by a long list of agenda tickboxes and compliance presentations. It is easy to miss the actual critical points in this journey.

Why do regulators have to be involved in board oversight as a risk element? Simply because we still have not evolved into a society where trust-based governance can be left alone to entities. Self-governance is some time away. For every negative outcome of broken trust, society goes deeper into remorseful bitterness over governance. Sadly, due to these lacunae, corporates get bogged down in ticking off compliance and regulatory factors, rather than engaging in the spirit of governance.

Family & friends

The governance aspect starts to decay when the founder brings family and friends into the majority of board roles and key staff roles. This complicates governance standards, as those individuals feel obliged to the founder and not to the business. The organisation’s ability to have honest conversations starts to get eroded, and the ability to attract key talent into the business is further impacted. Yet the concerns of the promoters seems to be in controlling the enterprise they started and in managing its destiny to their benefit.

One can be regulatorily correct in ticking all the boxes and yet be wrong in terms of the spirit of what’s expected. Suppose there is the childhood friend of a promoter, not related by blood or commerce. This person can be appointed to the board of his friend’s company through a formal search process led by a large search firm, with the nomination and remuneration committee (NRC) being involved in that search. How independent will this individual be on his friend’s board? What if their commercial transactions are run by entities that are not directly related, and operated by a maze of subsidiaries or even run by their family and friends? This is not a theoretical debate alone. In the digital era that we are in, governance framework can be put to the test by looking at various data that are available for any individual or company. To enable these, governance regulators and especially their supervision teams have to adopt digital frameworks and not just go with disclosed data that individual directors and entities are supposed to submit. Here is where a engaged and proactive regulator, by using SupTech & RegTech, can positively change the nation’s perception about corporate governance.

Boards & engagement

Are the boards fully engaged with the strategic discussions that are needed to ensure the good health of the entities? What if the boards are bored, and don’t spend sufficient time in discussing company matters? How can we make them more engaged and actually discuss agenda in detail? What about the risk of the board missing on its oversight itself? It adds up to a governance nightmare for regulators. The Covid lockdown taught us the power of zoom calls and other VCs. It showed us the way of having our meetings recorded. Can we take a leaf from this and make it mandatory for board meetings to be video recorded compulsorily? This could also indicate to the regulators as to which of the board members actually participate in the discussions and who are sitting in the meeting to do the tick-mark attendance.

Old boys’ network

Some of our current regulatory expectation expects boards, especially the financial entity board members, to have expertise in those sectors. This could limit the selection to the “old boys’ network” (ex-CEOs, retired financiers and retired leaders from regulatory entities). This has to change. Boards don’t need to have the same expertise, or even experience in the same field of the entity. Boards are expected to be curious all the time, to ask questions for safeguarding stakeholder interest.

Boards need to start asking questions beyond the board agenda and presentations, and they have to get tougher, before the going gets tough. Sometimes the change management which the board might have to initiate could even be — change the management! There lies the challenge.

For such an expectation, the board members need to spend time in the board meeting and efforts in chasing up those discussions into the next steps. But sadly today, most board meetings are fitted in between two flights that the outstation board members want to take. It is an amazing task that many boards actually seem to get going with their long lists of agenda, and get much achieved in those short timespans.

Right compensation

That brings us to a larger question : what is the adequate compensation for these board membership efforts? The current limit of Rs 1 lakh per board committee meeting seems low, considering the time and intelligence expected from board members. Even if a company board were to meet four times a year, and assuming a director is on three committees (apart from the main corporate board), the maximum the director would receive in compensation is Rs 16 lakh. In the current market, that is not a great compensation to expect heavy lifting of corporate accountability by any industry expert.

This is a topic that needs debate amongst our corporate regulators. The good individuals with industry expertise and high ethical standards need a better ROTI (Return on Time Invested). The narrative that independent directors have to give back to the society and not expect higher compensation is lopsided, and even unfair.

Of course, the elephant in the room is the “side compensation” (outside of regulation, and yet kosher by various contractual structures) that seems pervasive in the industry would only make the directors more beholden to their “paymasters”. It is very important to put an end to such a practice.

In the entire ESG conversation, ‘G’ (governance) is spoken about generally when something goes amiss. It is time we realise that this needs a drastic mindset overhaul, and we have more open conversations, however uncomfortable or painful the topic is.

Dr Srinath Sridharan is a corporate advisor and independent markets commentator. His Twitter handle is @ssmumbai

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