Corporate governance must be discussed
Corporate governance concerns the responsibility of the board of directors towards all the company’s stakeholders – shareholders, employees, suppliers, customers, consumers and society in general. The basic idea of corporate governance is to ensure the conditions under which the directors and key management personnel of the organization act in the interests of the organization and its stakeholders, and to guarantee the means by which managers are held accountable to capital providers for the use of assets. Corporate governance issues cover business ethics, the corporate culture that shapes the way a company operates and its organizational practices, board engagement and impact, corporate risk framework company and the granularity of organizational disclosures, among many other behavioral aspects.
Corporate governance, like democracy, will always be a work in progress. There is no perfect state, only an ideal state. There will always be hits and misses. This is where the challenge arises, how long, if at all, will it progress. Who will demand changes? What will determine the pace of change? Who arbitrates them? Who moderates a debate, a speech or a story? No ideal form exists even today and efforts would always continue to improve the dynamics, systems and interaction between the various participants in the process. The only criterion is whether it serves the interests of the stakeholders.
This is where governance regulators are expected to ensure fairness of ideology, transparency and robustness of their processes, and speed of decision, in the event of violations. Regulators are expected to be firm in their ideology and not shy away from industry lobbies or pressure. After all, if regulators cannot resist such pressures in the name of governance, how can they expect the industry to stick to governance in light of their capitalist pressures?
Mandemic & manels — the malaise
The very term “board of directors” conjures up images that are shrouded in gender and age biases. The reality of India Inc is that we fall far short of equal gender representation. Even the regulatory demand for female directors on the boards of large entities has been reluctantly met, as if there were a shortage of female experts. For a nation that celebrates Maa Shakti, we pretend they don’t exist in the corporate world.
As far as our boards go, even before the pandemic, we only had one mandemia. Hopefully the Corporate India ‘mandemia’ will be solved consciously. The same behavior is demonstrated in the various conferences and round tables that take place in the country, where the panels are filled with the participation of men. Unfortunately, gender equality is still just a story, a point of affirmative action. (Young) Age is always a barrier to meeting rooms. Age (older) has been mistakenly seen as a defender of good values, morals and ethics.
Nuts and bolts
Boards have a tough job, judging by the long list of rules of governance, statutory compliance and accountability expected of them. Judging by the seriousness and length of board meeting agendas and the true spirit of the discussions, one would expect these meetings to be serious and lengthy discussions, before they come to a decision to help the company. But most advice seems to be bogged down by a long list of checkboxes and compliance presentations. It’s easy to miss the real critical points of this trip.
Why should regulators be involved in board oversight as part of the risk? Quite simply because we still haven’t evolved into a society where trust-based governance can be left to entities alone. Self-governance is a long way off. For every negative outcome of broken trust, society sinks into remorseful bitterness about governance. Unfortunately, due to these shortcomings, companies get bogged down in checking compliance and regulatory factors, rather than engaging in the spirit of governance.
The governance aspect begins to decline as the founder brings family and friends into the majority of board roles and key staff roles. This complicates governance standards because these people feel obligated to the founder and not to the company. The organization’s ability to have honest conversations begins to erode, and the ability to attract key talent to the business is further impacted. However, the concern of the promoters seems to be to control the company they have created and to manage its destiny for their benefit.
You can be legally correct by ticking all the boxes and yet be wrong about the spirit of what is expected. Suppose there is a promoter’s childhood friend, not related by blood or trade. This person can be appointed to the board of their friend’s company through a formal search process conducted by a major search firm, with the Nomination and Remuneration Committee (NRC) being involved in this search . How independent will this person be on their friend’s board? What if their business transactions were managed by entities that are not directly related, and operated by a maze of subsidiaries or even managed by their family and friends? This is not just a theoretical debate. In the digital age we find ourselves in, the governance framework can be tested by looking at various data available to any individual or business. To enable this, governance regulators and especially their oversight teams need to embrace digital frameworks and not just accept the disclosed data that administrators and entities are expected to submit. This is where an engaged and proactive regulator, using SupTech & RegTech, can positively change the nation’s perception of corporate governance.
Advice and commitment
Are the boards fully engaged in the strategic reflections necessary for the good health of the entities? What if boards get bored and don’t spend enough time discussing company business? How can we make them more engaged and actually discuss the agenda in detail? What about the risk of the board failing to oversee itself? This adds up to a governance nightmare for regulators. The Covid lockdown has taught us the power of zoom calls and other VCs. He showed us how to have our meetings recorded. Can we take inspiration from this and make mandatory video recording of board meetings compulsory? It could also tell regulators which board members are actually participating in the discussions and who are sitting in the meeting to check attendance.
Some of our current regulatory expectations expect boards of directors, particularly board members of financial entities, to have expertise in these areas. This could limit the selection to the “old boy network” (former CEOs, retired financiers and retired heads of regulators). This must change. Boards of directors do not need to have the same expertise or even experience in the same area of the entity. Boards are expected to be curious all the time, asking questions to keep stakeholders interested.
Boards need to start asking questions beyond the agenda and board presentations, and they need to get tougher before things get tough. Sometimes the change management that the board might have to initiate might even be — changing management! Here is the challenge.
For such an expectation, board members should devote time to the board meeting and efforts to continue these discussions in the next steps. But unfortunately today, most board meetings take place between two flights that the board members at the remote station want to take. It’s an amazing task that many councils seem to actually tackle their long agenda lists, and get a lot of results in such a short amount of time.
This brings us to a larger question: what is 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 of board members. Even if a company’s board were to meet four times a year and assuming a director sits on three committees (apart from the main board), the maximum the director would receive in compensation is from Rs 16 lakh. In today’s market, it’s not much compensation to expect heavy responsibility from an industry expert.
This is a topic that needs to be debated among our corporate regulators. Good people with industry expertise and high ethical standards need better ROTI (Return on Time Invested). The narrative that independent directors should give back to society and not expect higher compensation is biased, if not unfair.
Of course, the elephant in the room is the “shadow compensation” (outside of regulation, yet kosher by various contractual structures) that seems ubiquitous in the industry would only make admins more beholden to their “paymasters”. . It is very important to put an end to such a practice.
Throughout the ESG conversation, we usually talk about “G” (governance) when something is wrong. It’s time for us to realize that this requires a radical overhaul of our mindset, and to have more open conversations, no matter how uncomfortable or painful the topic.
Dr. Srinath Sridharan is a business advisor and independent market commentator. His Twitter account is @ssmumbai
(To receive our electronic document daily on WhatsApp, please click here. To receive it on Telegram, please click here. We allow sharing of the PDF of the document on WhatsApp and other social media platforms.)