In fact 2018 was a year of turbulence for many corporates that failed to get the corporate governance story right. In India and abroad, from banking to automobiles, no industry was spared. The highlight of corporate governance was the sacking or resignation of too many chairpersons and CEOs. All these seem to point out to one issue; whether the contemporary corporate governance has outlived its purpose and needs a complete re-vamp.
I have believed that corporate governance has just six simple tests that every corporate need to get it right when it comes to governance issues and I put them as the 6Cs - composition, communication, conflict, compensation, compliance, contribution.
Here, I will be focusing on composition of boards and that includes board diversity which is not on the contemporary list and is a new age requirement.
Who is corporate governance for?
Corporate governance was predominantly for board and shareholders. As things change, the focus shifts as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term. Stakeholders in this case would include everyone ranging from the board of directors, management, shareholders to customers, employees and society. The Indian Companies Act has laid this out in section 166(2) describing who are the stakeholders and to whom the directors owe their fiduciary duty.
What role does board diversity play?
The term "Corporate Governance" and "Board Diversity" go hand in hand. Board diversity deals with not only gender but a whole gamut of issues that include geography, skill set, experience, ethnical and age. The codes of good corporate governance should include gender diversity as a key component. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. The board of tomorrow need to reflect upon and understand the dynamics of society today and be prepared for constant change at an ever-increasing pace. The diversity at board level means having a board that consists of more than one type of persons that will bring benefit to an organisation.
Why is then a "man's world" out there?
Corporate boards across the world generally have a predominance of male directors. Research shows a lack of diversity in terms of gender, race/ethnicity and international expertise at a time when "global" defines the business climate. By diversifying your board, you increase the number of potential board members, which increases the chances that you will end up with a board member who has the necessary skills, experience, and intelligence to make good decisions for your organisation. In addition, you do more than widen the talent pool at the top of the company - you send a signal that developing women and minorities as leaders is equally important for you.
What should the future of corporate governance be?
The corporate failures that resulted in scams from Satyam in 2009 to the very recent ones like IL&FS, calls for a need to make corporate governance in India transparent as it greatly affects the development of the country.
The Indian Companies Act of 2013 has introduced some progressive and transparent processes which benefit stakeholders, directors as well as the management of companies.
- One or more women directors are recommended for certain classes of companies.
- Every company in India must have a resident director.
- The independent directors are a newly introduced concept under the Act. A code of conduct is prescribed and so are other functions and duties.
- Every company must appoint an individual or firm as an auditor. The responsibility of the audit committee has increased.
- Top management recognizes the rights of the shareholders and ensures strong co-operation between the company and the stakeholders.
- Every company has to make accurate disclosure of financial situations, performance, material matter, ownership and governance.
The underlying principles of corporate governance includes principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. The rules and regulations are measures that increase the involvement of the shareholders in decision making and introduce transparency in corporate governance, which ultimately safeguards not only the management but the interests of the stakeholders as well and fosters the economic progress of India in the roaring economies of the world.