News: Corporate governance and its case in India

C-Suite

Corporate governance and its case in India

Companies in India are investing more in corporate governance and integrity, but they are also more willing to tolerate unethical behaviour: still some way to go, says a recent report by EY.
Corporate governance and its case in India

The recent resignations of three independent directors at PFS, an NBFC under the RBI, citing reasons like a lapse in corporate governance has brought the focus on the issue. A first in recent times of the BFSI sector, the three independent directors went on record to call out the mismanagement and "instances of serious lapses of governance and compliance" as their primary reasons to resign. The matter now is under the purview of SEBI, which has given the company four weeks to address the complaints raised against its corporate governance issues. 

Such complaints raised against a company are symptomatic of a larger trend across India Inc. A 2022 study on corporate integrity by EY, stated that over 55 percent of leaders and employees across India and the globe noted that the level of corporate governance has either remained the same or fallen over the last year. 

In times where work and business models are being fast reshaped, many question how companies are keeping up with the promises they make. Such cases where corporate governance takes a back seat to performance point to larger questions of integrity and how effectively companies are navigating the new paradigm of governance.

Evolving nature of corporate integrity

While integrity within a corporate setting remains difficult to quantify, it remains highly valued across India and the globe. Over 97 percent of respondents to the EY Global Integrity Report 2022 agreed that corporate integrity is an important factor to them. This is reflective of shifts in how businesses operate today. More companies are investing in integrity training and have structured organizational values and codes of conduct. Responding to societal expectations, businesses are also evolving their corporate and social responsibility standards and adopting more rigorous environmental, social and governance (ESG) measures that demonstrate their commitment to those sentiments.

While these commitments prove vital in improving the integrity of a business, the report has some alarming findings. There appears to be a willingness among the most senior executives to act outside the ambit of compliance rules. Board members who were questioned as part of the research were five times more likely to falsify financial records as compared to employees (15 percent vs. 3 percent) and six times more likely to say they would be willing to mislead external third parties such as auditors (18 percent vs. 3 percent).

Compared to previous years, the report notes that the pressures of the pandemic have shifted how top leaders view integrity. The 2022 survey shows that over 42 percent of board members agree that unethical behavior in senior or high performers is tolerated in their organizations. This number was only 34 percent in 2020. Additionally, more board members today (34 percent) agree that it is easier to bypass the business rules in their organization than in 2020 (25 percent). 

Addressing the governance issues

While corporate integrity remains a crucial component of corporate wishlists, improving the marker involves working closely with the human component of businesses. It requires a shift beyond the ‘tick in the box' solutions and focusing more on creating a culture that promotes integrity is crucial in making it an achievable goal within companies. This helps align expectations throughout the company and reduces the mismatches between senior management’s perceptions and their employees, which can develop rather quickly in a business environment marked by rapid changes. 

The rise in demand for greater data transparency would also lead to companies proactively adopting better practices. ‘There will be fewer places to hide as data increases the transparency of all of a company’s interactions and transactions,’ notes Corey Dunbar, Ernst & Young (US), Forensic & Integrity Services, Principal. This further accentuates the need for companies in India to adopt more robust governance practices and prioritize integrity. 

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