The Future of Corporate Governance

Until recently, corporate governance mostly came to focus only when there were corporate misdemeanours or failures or a loss of investor confidence arising from such episodes. However, now a reactive approach towards corporate governance is generally considered suboptimal. Owing to this change in approach, a number of Boards now find it practical to not look at governance merely from the present tense lens, but based on what the Board and the company would require in the future. Conversations on whether the Board is future-ready have become more common, than in the past.

Some of the things that Boards, that have an eye on the future, look at are:

1. 1. Stakeholder engagement:

      While shareholders are important, Boards and companies now focus on all stakeholders of business. This shift will continue to be centrestage. The Stakeholders Relationship Committee should play an important role in this shift.

   2. Diversity in Board Composition:
      

      It is accepted that diverse Boards, with representation across genders, varied backgrounds, skills, and experiences, support well-rounded decision-making by bringing different perspectives to the Board. However, diversity should not be a tick the box approach. It should focus on missing skillsets on the Board, with an eye on the future needs of the company, so that the Board is future ready. Further, once Directors are appointed, there should be efforts to upgrade the knowledge of the Board members through well planned familiarisation and training programmes.

   3. Artificial Intelligence (AI)
      

      Companies have started shifting towards the use of AI. It is important that Board members are aware of what to ask management and what to expect by way of changes that AI will bring. Boards should also not lose sight of the risks associated with AI, including, but not limited to, its impact on the business model or functioning of the company. Ethical use of AI is another aspect that the Board has to be mindful of.

   4. Cyber security and digital risk oversight:

      Cyber and digital risks have been an omnipresent risk for all businesses. Cybersecurity cannot be viewed only as an IT responsibility. Risk Management Committees, and in turn Boards, need to understand the organisation’s exposure to these risks and to ensure that appropriate mitigation mechanisms are in place. Increasingly, companies are investing in cyber insurance too.

   5. Greater focus on society and sustainability:

      Companies are becoming aware of their impact on the environment and society. Stakeholders and investors have started paying more attention to ESG related matters, in addition to the financials of the company, before investing. Most Boards have started entrusting a Board level committee to plan the ESG strategy for the company.

   6. Transparency in executive pay:
      

      Executive pay continues to be an important concern for most shareholders. There is growing pressure on companies to be more transparent about how executive pay is determined. There is a need for Nomination and Remuneration Committees to ensure that proper benchmarking is done and transparent disclosures are made to the shareholders.

   7. Board evaluation:

      Board evaluation was first mandated in India in 2014. Since then, the experience of Boards undertaking this annual exercise has been mixed. While some put in place a productive process, focused on feedback to Directors and an action plan emerging therefrom, other Boards continue to treat this as an annual tick box exercise. For Board performance to improve, this exercise should be done diligently, and an action plan must emerge.

   8. Succession planning:
      

      This is one of the roles of the Board which is still not being performed well by most Boards and Nomination and Remuneration Committees. Succession planning, whether for the Board members or for top management, remains an on-paper job. There is an urgent need for Boards to not postpone this.

   9. Managing the workforce:

      The best process will come to grief if the right persons are not in place. The composition of the workforce has changed, with different generations, with varying expectations, sharing the workforce. The Nomination and Remuneration Committee and the Board need to understand this shift and rework communication strategies and engagement strategies.

Corporate governance processes in a company do not change overnight. This is a continuous process. Focus on the future is what differentiates great companies from good companies.

Prajesha Nair