Malpractice & Malfunction- Corporate Governance Woes

Does being in power eventually corrupt you? Are you bound to falter and bend the rules in your favor if you think you can get away with it? If you are having a tough time answering these questions as an individual, imagine the ordeal of an entire organization that goes through it! Let us look at how a few organizations and their leaders have floundered recently, and the phenomena of corporate governance in India.

Investopedia describes ‘Corporate Governance’ as the ‘the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community.’ Hence, corporate governance lays down the framework for every sphere of management, big or small, in an organization.

The board of directors is the biggest player in ensuring effective corporate governance. Elected by shareholders or other board members, directors represent the interests of the shareholders of the company and make decisions related to appointments, executive compensation, and dividends. A board of directors consists of ‘inside’ and ‘independent’ members to ensure a balance of power. Bad and ineffective corporate governance naturally casts a shadow on a company’s ethics, integrity and commitment to shareholders, which can negatively impact the financial health of the organization. 

In the recent times, several instances of downright failure of corporate governance have grabbed the headlines. Let us take a look at some of the more prominent cases that have been in the spotlight:

The board of directors is one of the most crucial aspects of any organizations’ corporate governance framework. It is, thus, important to understand that the concept of directorship to the board of directors is viewed a little differently in India when compared to the rest of the world. For many, raising a valid concern equals being chucked off the board, and hence, they choose not to say anything. For instance, directors are expected to be onboard to grant repeat extensions to top leadership, no questions asked. The problem, as explained by the Economic Times, might be that as opposed to global companies that approach head-hunters and search firms to hire independent directors, in India, the process is largely ad hoc. Therefore, independent directors are usually chosen based on familiarity, and not necessarily merit. For example, when the regulation to have one woman on the board was officiated, many company heads tried to get their wives or daughters placed as directors on the board. 

If the appointment process wasn’t murky enough, the absence of clarity on the role further puts the role of directors in jeopardy. They need to be given the autonomy and space to ask the tough questions and discharge the responsibility they have been appointed for. However, there exist no incentives for directors to apply their autonomy or exercise their independence. Those who do, do so while keeping the top leadership happy. This not only makes the company less welcoming to independents and outsiders but also makes it less competitive. 

In June 2017, SEBI formed a committee under the leadership of Uday Kotak (of the Kotak Mahindra Bank) on corporate governance and elicited recommendations to improve the standards of corporate governance of listed companies in the country. The Kotak Committee submitted its report in October 2017, post which public comments were invited. Last month SEBI announced that its board of directors had accepted several recommendations in their entirety, and some with modifications. Key recommendations regarding directorship like decreasing the number of listed companies in which a person may be a director, increasing the minimum board size, having one independent woman director, and separation of roles between the CEO/MD and the chairperson, have been accepted. 

Furthermore, recommendations on enhancing the eligibility criteria and roles for independent directors, increasing the role for committees, setting meetings and procedure guidelines and increasing disclosure and transparency have also been accepted. The way in which these accepted recommendations will be implemented remains to be seen, but they set a fine precedent for the future of corporate governance in India. More recently, lawyers and auditors are also growing cautious of the companies trying to manipulate books and records. With stricter rules and regulatory practices in place since the Companies Act of 2013, instances of auditors and lawyers quitting, rather than helping companies get away with such acts have gone up. 

Hence, despite the many instances of bad corporate governance that have come to the fore, progress, no matter how glacial, is underway. For every instance of a CEO misusing his/her position and getting away with it, there must exist an example of one who was penalized and stripped of his/her position. Instances of a board exercising its power to remove the top leadership are not very hard to find. Come to think of it, maybe it is natural for humans to err when they are in a position of power. If that is the case, we are a long way from ensuring that the error doesn’t cause any damage, let alone, prevent it from occurring in the first place.