CNV3-I1-6-Nexus

“While Culture is the biggest determinant, good governance or a certain kind of governance makes a huge difference in our lives & HR has a Key Role to play in this regard.”

-Anonymous

Introduction

Corporate governance (CG) refers to effective management of all its resources, physical as well as human, in the interest of all the stake holders including the society at large. CG is a system, set of processes, customs, policies, and laws by which business corporations are directed and controlled. Governance and HRM are interwoven and impact each other. With our constitution having committed to a sovereign, secular, socialist & democratic republic, corporate governance in general and HR governance in particular has to be objective and the direction chosen needs to result in betterment of all.

Let’s first look at the concept of Corporate Governance (CG) & why it has become an issue?

After witnessing a series of governance failures, a committee was setup under the chairmanship of Sir Adrian Cadbury to investigate the British corporate governance system and to suggest improvements to restore investor confidence in the system. As per the report, Corporate Governance(CG) is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled.

Some might argue that while governance at the corporate level is a must and of paramount importance, governance for HR is optional. However, given the cutting edge being provided by HR, with equal accessibility, availability & affordability of all other resources, organizations need to put in meaningful principles of governance in their daily processes and operations for ensuring optimal utilization of resources. This is all the more important with focus shifting from solo profit motive to triple bottom line (people, profit & planet).

Organizations which do not pay heed to good and effective governance, with robust systems and procedures, coupled with transparency and accountability with responsibility towards larger interests of the society, will do so at their peril only. While governance need to be flexible to confirm to the changing scenario, it's principles etc., should stand the test of time.

HR Governance & Requirement

HR is a core component of overall corporate governance, as it facilitates smooth functioning of organization. In current context, where HR needs to align with overall business strategy, requires to synchronize both HR & CG and this hardly needs any emphasis. Because HR governance includes organization, managing and measuring HR function with its implications for management and employees. A good and effective HR governance, which compliments and sustains overall corporate governance, requires clear organization’s desired HR strategy, its scope, clarity of roles, responsibilities etc., Today's VUCA situation demands balancing of effective oversight and confidence with the need for focused HR strategy execution. And this is required to differentiate and enhance competitive position of the company over the longer term.

Corporate Governance & Human Resource Management (HRM)

As we all know, once the corporate strategy is formalized it's the executives, directors and shareholders who ensure its effective implementation. Here comes the facilitating role of HR in terms of building culture and shaping of required practices. We all know that every function in the organization contributes it's bit to the overall corporate governance. Let's see how HR facilities good governance in few areas:

1.Executive compensation: Executive compensation has always been treated as something that’s secret & confidential to be left to the likes of CEOs and boards of directors only. But HR officials, who know their company's business thoroughly, can and should play an important supporting role in establishing and adjusting compensation for the CEO and other top managers. Further, HR professionals who are vested with the responsibility of executive compensation issues should have a solid understanding of all the relevant issues.

It’s accepted beyond doubt that; talented CEOs and senior staff are very critical for company’s growth. It’s also true that they need to be appropriately compensated so that they remain a motivated lot and chip in with their best. And it is in shareholders’ interest as well. Given this challenge & need to keep the morale of executives high, a meaningful framework should be set to guide executive compensation. Further, this should ensure correlation with performance, apart from factoring in suitably the ownership & accountability related issues.

Effective remuneration strategies require

•                    Developing appropriate peer group to benchmark with.

•                    Deciding appropriate terms of employment.

•                    Suitable measures to assess economic value added, topline growth etc.,

•                    Calibrating the remuneration levels at different levels of performance on these metrics.

2.Hiring a new CEO: HR can help in hiring of CEO by taking control of the process. And HR will be useful to the board in selecting an executive search firm, performing background checks or providing data on compensation packages. Further, HR can also help in knowing about ethical lapses of candidates, if any, for the top job, through background checks. This is all the more important, in an age where the ethics of corporate leaders are increasingly coming under scrutiny.

3. The Leadership Pipeline

An agile organization requires sound leadership pipeline and a weak leadership pipeline would be the greatest risk not only to the company but shareholders as well. In this regard, HR comes in very handy by defining the appropriate leadership competencies for the organization, designing selection and assessment methods around these competencies and creating frameworks or mechanisms wherein high potential talent can be identified and nurtured and a healthy pipeline is created. With active involvement of HR grooming talented people with integrity becomes easy. And it can play a key role in formulating strategies for creating/nurturing ethical culture and values. In other words, we are advocating a policy of involve- inform- inspire, so that HR could play a key role in "Turning employees into corporate governors."

4. Evaluating Boards

Boards of companies are vested with the responsibility of not only monitoring company’s performance but taking required remedial measures as well. Hence, evaluating their performance too is required, if good governance is to be attained, as its they who set the direction and steer the ship. But hesitation is preventing to act on this critical aspect. It's high time we start evaluating independent directors in terms of outcomes expected, skills and behaviors required to achieve these outcomes and activities that need to be focused on to achieve the said outcomes.

What Needs to be Done?

A corporate sustainability frame needs to be put in place with a set of corporate values and a culture that ensures the long-term survival and prosperity of the firm. With independent boards, corporate sustainability can tackle the above challenges. The said frame should have its components as

·         Culture of high trust at all levels.

·         Employee ownership and responsibility.

·         Sustainability, ethics and diversity.

·         Involving employees in these initiatives.

·         Training employees on environmental, ethical and diversity issues.

·         Linking performance appraisal and rewards to sustainability, ethics and diversity.

Before closing, let’s see what we can learn from Kautilya (Chanakya) who wrote his celebrated treatise on Statecraft – Arthashastra or Law of Economics:

Corporate Governance & Chanakya

According to Chanakya, king should discharge his duties in the best manner keeping in mind his responsibilities and ethics and not do anything for his own welfare. This shows that a leader is bound by his duties and ethics, which are the driving force today to run the business effectively and efficiently. Further, a person who assists King should be a right person, selected based on series of tests and purely on merit.

Kausalya’s Arthashastra has many operational details relating to corporate governance such as the ideal size of board of directors, ways to check corruption, graded punishment for offenders, etc., Some of the specific principles stated by Kausalya relating to Corporate Governance & HR role include;

•      Right person for the right job (competent employees-crucial for effective HRM).

•      Selecting people who are not fraudulent, dishonest, cruel, lack enthusiasm, incompetent and cowardly.

•      Informing people of the existing laws.

•      Codification (Labour codes for instance by GOI) of all the rules and regulations.

•      Clear, consistent & complete laws, devoid of unambiguousness.

•      An organizational structure, which reduces the scope for conflicts of interest.

•      Creation of an ethical climate in the state and also suggested various measures to enhance it.

•      Leader of any organization should maintain high standards while running it.

Conclusion

Mervyn King had clearly said that good corporate governance makes good sense. And in the contemporary times of today companies need to conform while performing. However, it’s not to say that the above tasks are easy to execute. But if steps are not taken in this regard for good governance, we will continue to overlook issues like Director and CEO performance etc., which will prove fatal for the organizations.

It’s worth recollecting what Peter Drucker who once said the purpose of the business is to find a customer meaning profit, later on admitted that the interests of society should become guiding interests of the company (loadstar). So let’s hope that the leadership in the times to come will encourage and facilitate the promotion of acceptable societal values. And these values should stand the test of time and be acceptable to all the stakeholders of the company in particular and the society in general. Lastly, some of the principles enunciated by Chanakya in his Artha Shastra will definitely come in very handy to those at the top for effective governance. Let me close with Charles F Kettering’s quote “we should all be concerned about the future because we will have to spend the rest of our lives there”.

Dr Jagan Mohan Reddy, Professor of HRM and Ethics at Symbiosis Institute of Business Management, Hyderabad