CNV3-I1-4-HR Role
Current challenges in Governance
In the past two decades, we have regularly seen governance failures in corporate India with well-established companies like Ranbaxy, Satyam, Kingfisher, United Spirits, Ricoh India, Fortis etc. More recently subtler issues of indiscretions of leaders like ICICI bank continue to raise red flags of weak governance within Indian Corporates. These issues have significant negative impact in the business community, industry and country. The investors are directly at loss with such governance failures. And the leadership indiscretions continue to shake the belief system of employees, customers and suppliers in organizational leadership. The community and public confidence are rattled when the scams and frauds of reputed organizations are flashed in media. Overall, the corporate governance continues to be challenge for India.
It’s not that no action has been taken! Government came up with amendment in Companies Act since year 2013 to strengthen the corporate governance in Indian companies. Efforts continue with new Companies (Amendment) Ordinance, 2018, where the Union Cabinet recently approved promulgating an ordinance for companies’ law amendments to plug gaps in corporate governance and enforcement framework as well as improve the ease of doing business. However, there is a need to strengthen it further. So, let’s first understand some of the fundamental corporate governance issues within India.
Corporate Governance and its ownership
Simply put, Corporate Governance is set of rules, policies, frameworks, processes and practices by which the organization is directed, controlled and managed to balance the stakeholder’s interests which include Shareholders, management, employees, customers, suppliers, government and community. The accountability lies with Company Managing Director and Board of Directors to ensure the corporate governance is executed well. However, like we have seen in several situations that failures have occurred primarily due to certain fundamental issues which go beyond tangible controls.
Fundamental issues
Simply put some of key issues that have been observed in corporate governance;
1. Irregularities driven by desire to grow the business.
We have seen that the management have taken decisions by bypassing the legal regulations and manipulating the information to grow their business. Fundamentally, it’s the pressure to perform by the management and willing to bend the rules has resulted in irresponsible actions. The action is often driven by behavior for personal ego satisfaction and self-preservation of position within organization.
2. Exponential Increase of net worth of the organization.
Then there is case of promoters trying to increase the net worth of the organizations through fudging of accounting records. Although the recent amendments have tried to strengthen the controls, however fundamentally the decisions and actions in the organizations are driven by avarice. Also, the focus is more on the model of Shareholder value v/s Stakeholder value.
3. Conflict of interest of personal benefits v/s right thing to do for stakeholders.
Also, we have seen that senior leaders or promoters have taken advantage of their position to benefit personally. This may vary from leveraging their positions to get their near and dear ones some sort of business or monetary benefits to appointment of their relatives in undeserving positions. Also, at times we have seen that the eagerness for the MD and CEO to earn his/her incentive compensation results in indiscretions, irregularities or failure of judgement for personal gain. In short, the decisions taken are in vested interest rather than stakeholders’ interests.
4. Absence of conscience and courage to flag out the issues.
The Board of Directors are appointed for governance and ensuring that organization affairs are being managed properly. However, we find that they are relatively weak and do not take stance in front of the promoter Director or the Managing Director and CEO. Most of the time, the absence of strong courage to flag out the issues result in leadership indiscretions and governance failures.
5. Lack of Integrity and ethics in organization culture
Organization culture plays a crucial role in sustaining the corporate governance. Integrity and transparency is the key value within organization and lack of it within company culture leads to governance issues.
Although, lot of work is being done to strengthen the corporate governance at management level, the major gap continues to be at the Board of Directors level and Managing Director level. The question is whether HR leaders have managed to build credibility to add value in corporate governance arena?
Adding value in Corporate Governance by HR Leaders
Is HR pulling their weight in corporate governance? Are the HR leaders in India really focused on Corporate Governance? Do they have ‘say’ in corporate governance matters? Do they have confidence of BOD and Management to lead the governance matters related to Human Capital of the organization? These are most of questions which come in the mind when you think of HR Leaders role in corporate governance.
HR Leader's primary governance responsibility is to direct, control and assess the company's human capital for successful achievement of organizational objectives. In addition, they are accountable for creating an organization design, pipeline of leaders and related human capital processes for stakeholder alignment, value creation, risk management, resource utilization, performance management and organization sustainability. In last decade within India, we have seen that HR leaders have taken ownership of introducing the code of business ethics and reinforced a value-based model; however, the question remains - is that enough and whether HR leaders have managed to build their personal credibility within the company and industry?
Here are few perspectives for serious consideration for strengthening corporate governance within the organization which requires initiative from Board of Directors as well as HR Leaders within the industry.
· Stakeholder value: We see that most of organizations have primary focus on shareholder wealth creation. Although there is nothing wrong about it, but the scope is narrow as compared to stakeholder value creation. Also, various organizations link their creation of shareholder wealth with the executive compensation of Senior Management. Although, there is not much wrong about the approach, but it does lead to error of judgement in pressure situations by Sr. Management team. The need for a value model where the shift is from pure focus on creating shareholder value to stakeholder’s value creation. Here stakeholders include Shareholders, management, employees, customers, suppliers, government and community. A shift on stakeholder value model with linkage of executive compensation to stakeholder value will enable a focus on balanced approach rather than single focused approach to increasing net value of shares at stock market. This approach can be influenced by HR Leaders in collaboration with Board of directors.
· Culture: The development of organizational culture is the most underrated aspect in most of the organizations, since most of focus is on tangible aspects. Whereas Culture is an intangible aspect and its real value is only realized when things deteriorate to level and governance failures happen. Fairness, Accountability, Responsibility and Transparency are the key principles of organization governance. Ensuring that these principles are built in the organization culture is an absolute imperative. HR Leader’s role is pivotal to creation of organization culture. Most of the HR Leaders do realize it but often fail to stand up to the MD and CEO and/or influence the Leadership team to invest in Culture building. Either it’s an ability to influence or lack of personal credibility in leadership team to get investment for the intervention. A better way is to get an experienced HR Professional on the Board of Director who will ensure that the necessary focus on creating an organization culture that reinforces the governance principles is top of the agenda.
· Executive Compensation: The Executive compensation is key financial motivator to ensure the accomplishment of organizational objectives. Many times, the design of executive compensation is such that it leads to avarice in the leadership team. The focus changes from creating shareholder value to achievement of personal gains. So, the design of executive compensation is critical to maintaining a balance between the motivation to achieve v/s focus to increase personal income by leadership team. The primary accountability lies with the HR Leader to develop executive compensation which minimizes temptations of wrongdoings for personal gain by leadership team. In situations where there is a challenge to design the right balance, external support of consultants or HR Expert in Board of Directors is a good back up option for the HR Leaders.
· Succession Management: An organization has major accountability to ensure business continuity with appropriate pipeline of leaders. Succession planning of CEO and Leadership team is one of the key accountabilities of HR Leadership team. From an Indian context, we have seen process is sensitive as it often creates nervousness with various organizational leaders. The instinct for several of the HR Leaders is to avoid unpleasantness or conflict and do a tick box activity with respect to Succession Planning. This leads to impact the quality outcome of the Succession Management intervention. HR Leaders who have been successful in implementation of succession management have managed to accomplish two aspects – building personal credibility and creating a culture of transparency within the organization. These organizations have ended up using more of a neutral approach with engagement of outside consultants to drive the succession planning process thereby minimizing bias and increasing the fairness within the process. The consultant engagement in succession planning also gives an opportunity to raise any red flags observed during the assignment.
· Performance Framework of Board of Directors: The Board of directors are essentially the ‘Guardians’ have responsibility to ensure the organization performance is being managed properly by the Leadership and Management team. However, the question rises who is responsible for ensuring that the Board is really performing its role diligently. Often the challenge comes when the Board of Directors get swayed by the Promoter director or Managing Director. The failure of Board of Directors (Board) to really identify the organization discrepancies or unable to influence the decisions result in financial losses for investors. Hence, someone is required to essentially identify whether the Board of Directors are really doing their role. And this role can be either played by Organizational HR Leader or a member of the Board from the HR Background. The role will essentially involve selection of the right board members (using latest tools for role fitment), ensuring the Board is performing its role, assessing the performance of Board and raising red flags when group dynamics within board start negatively impacting the functioning of Board. The role involves watching the ‘Guardians’ and building a culture of governance that does not allow the Board’s performance to deteriorate.
Conclusions
Some of the major continued issues in corporate governance can be resolved by building the right culture and accountability structure in the organization. HR leader and Consultants with a rich experience and wisdom have a critical role to play in strengthening the corporate governance. However, precursor is to build a credibility where they seat on Board is offered. The HR leadership fraternity must move from Strategic Human Resource management within organization to playing a role in corporate governance and organization sustainability. Since the people is the common denominator in any organization and the HR leaders have the expertise to understand and manage the complex human behavior; the HR leadership has rich opportunity to foray into new arena of corporate governance. This will require a paradigm shift for HR leadership - from Shareholder value to stakeholder’s value creation and management.
It’s imperative that organizations need to look at this available latent HR talent and provide an opportunity to avoid potential loss of shareholder’s wealth. A change of perspective by organization leaders and necessary action (taken now) on introduction of HR leaders and consultants in board will lead to further strengthening of Corporate governance.
Vidhu Sharma[1]
Founder Director, Kindled Perspectives, Mumbai
[1] Vidhu Sharma is an Organization Development Consultant, Executive Coach and Leadership trainer with rich experience of 22 years as Global Strategic Human Resource Leader engaged in facilitating organization and individual transformation. He is a retained HR Advisor and business coach to different organizations.