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Corporate Governance is best described as “internal democracy” coupled with “external responsibility”. In a broader sense corporate governance depicts the processes, systems, structures and practices that a company follows to manage its business to accomplish the strategic, operational and financial objectives keeping long term sustainability in view. These basic tenets if followed with ethics and integrity, can win over all stakeholders thus building positive image of the organization. In fact, every company though has its own identity, its performance is weighed and watched, and its behavior draws perceptions that weave an image of its existence. Thus, company’s image revolves around factors such as ethics, environment, employees, leadership, social responsibility, care for stakeholders and its very own communication. Corporate governance not only protects investors but also maximizes corporate value, as well as increases confidence on the capital markets front. Though intangible, image of a company is precious asset that can determine the choice of customers, investors and various other stakeholders. In order to build this, good corporate governance is a must. Image of the company and CEO or other senior management team have a close connection. Quality of internal organization matters a great deal for building corporate image.

Image Loss

Stakeholders have in many cases lost confidence in the role of boards members due to scams and scandals that have rocked the company. Sheer lack of oversight, disobedience and misuse of independence in decisions by Board of Directors has led irrecoverable lapses by companies. Can one ever erase from memory the Bhopal gas tragedy, one of world’s worst disasters on 2nd December 1984, as a result of “corporate negligence”? Union Carbide’s underinvestment to reduce expenses and unsafe work conditions ignored by the CEO and other senior leaders led to loss of thousands of lives.

How about disgrace brought to the business world by the IT giant Satyam? We saw the extinct of Satyam’s identity when its very founder Ramalinga Raju manipulated 14,162 crores and duped the shareholders of the company. The Founder lost face, was arrested and the company was taken over by Tech Mahindra. Ricoh is ditto Satyam scam in terms of manipulating stock prices and accounting fraud.

Once upon a time known as “King of good times” and liquor baron, today a willful defaulter, Vijay Mallya’s Kingfisher and United Spirits lost their legacy due to falsification of accounts and other illegal inter-related funding.

ICICI has shown its credibility ever since incorporation but the recent case against its CEO Ms Chanda Kochhar, where CBI has alleged her responsible for favouring Videocon Industries by declaring INR 2810 crore of the outstanding debt as NPA has shocked people. ICICI case is a fine instance of how senior leaders enrich themselves not realizing they owe explanation of every penny to the shareholders. Conflict of interest can be the devil in disguise many times. The ex- CEO of ICICI Bank, had to face several inquiries and stringent action for the lapse. Vested interests of senior leaders can cause loss of image not only to themselves but also the organization they represent.

Indian corporate governance report by the BSE Ltd., IFC and Institutional Investor Advisory Services indicates three companies viz: HDFC, Infosys and Wipro on the top of good governance for the year 2018. Not surprisingly, among the S&P BSE listed 100 companies Mahindra & Mahindra Financial Services, HUL, Marico, Bosch, Crompton Greaves, Mahindra & Mahindra and Bharti Airtel have been rated high on corporate governance. These are companies that have better disclosures, practice robust checks and balances, have fulfilled their responsibility towards society and stakeholders, thus can claim to be ideal benchmarks for companies aiming at higher corporate governance threshold.

It is pertinent to note that several such lapses in corporate governance have brought downfall of companies and renowned personalities who could have otherwise flourished with proper adherence to corporate governance. Shareholders’ confidence matters a great deal. If a company does not care about adhering to good governance, it will risk losing the confidence of its shareholders. Shareholders, in the absence of confidence may end up selling their existing stock, leading to diminishing value of shares and business. Falling share value with growing perception about poor governance within a company can lead investors to lose trust in the company and may want to part ways. Potential investors also may stay away from companies that lack credibility.

7s of Corporate Governance

·         Stark clear organizational Strategy: Good governance is envisioning the future, setting directions with goals and policies and strategically spearing the organization to heights of success.

·         Safe and effective Risk Management: It is important for companies to assess and evaluate the financial, operational, environmental, legal risks. Creating a framework with tolerance and accountability for managing risks is essential. The Board must be on the vigil with ample checks and processes to mitigate and monitor risks.

·         Strong Commitment and discipline: Where self-discipline alone doesn’t work, market discipline brought in by regulators play necessary role. Commitment of the company is the reason shareholders and customers have invested stake in the company. For any company to prosper and meet up to the results assured to stakeholders , adherence to corporate governance and discipline in their conduct matter the most. Self, market and regulatory discipline, all three count for fulfilling commitments.

·         Stay fair towards employees and customers: It is important for companies to maintain a code of business conduct and conflict of interest policy. Whistleblower policy must be in place for employees to feel free and safe to vent their grievances. It will be essential for the company to arrange a person for oversight and adherence to management policies and procedures.

·         Sharing necessary information and maintaining transparency: With Kotak committees’ latest amendments in corporate governance, submitting quarterly results of the company’s performance is mandatory. Half yearly cash flow statement, regular audits and checks will also enable maintaining transparency. The annual report, board composition, policies and code of conduct will have to be listed in listco’s website and e-mailed to shareholders.

·         Sense of Corporate Social Responsibility: CSR is a step in the direction of effective corporate governance. The point here is that companies that practice good corporate governance are also those that are socially and environmentally responsible. The implication here is that unless corporates practice good governance, they are unlikely to have a social conscience and hence the first step towards CSR is through practicing the art of effective corporate governance.

·         Self-Evaluation at regular intervals: Companies must create an evaluation pattern for their governance performance that would enable introspect its actions. This could be through involvement of CEO and other senior leaders. The process of self-evaluation can be through interviews, opinion seeking, brainstorming etc., that can bring important feedback on board performance. Companies could also approach third party facilitator with expertise on corporate governance to guide on best practices.

To Sum Up…

Corporate governance not only builds image of the company but also of the nation. India was given a score of 54% in 2018 on corporate governance by Asian Corporate Governance Association thus ranking it seventh amongst 12 Asian countries. Further amongst 150 countries, India was placed in Group 2 SAHA Ratings, in 2018 World Corporate Governance Index. Kotak Committee’s recommendations will see light from April 2019 which aims at transparency, fairness, accountability and responsibility.

A company that does not adhere to its corporate governance strategy runs the risk of weakening the confidence of its shareholders. This may happen because shareholders feel misled about the company's organizational structure and business strategy. If shareholders believe bad business decisions are in the company's immediate future, they may begin to sell company’s stock to avoid potential loss. A large sell-off of company stock can lead to falling stock prices, which diminishes the overall value of the business. Companies have a choice between image and damage. Good corporate governance builds image while a bad one does irreparable damage. It will be good for companies to follow the mantra: “Be Proper in Corporate governance and Prosper in abundance.”

Dr Lakshmi Mohan , Director- ITM Business School, Kharghar, Navi Mumbai