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A closer look at the essentials of Corporate Governance

Corporate Governance is the philosophical underpinning of a set of systems, standards, policies, and procedures put in place by a company, to ensure that the business is run in a transparent and efficient manner. It essentially involves safeguarding the interests of all the stakeholders and encouraging a trustworthy, moral, as well as ethical environment in the company.

Corporate Governance stands on the basic pillars of:

  • transparency in the conduct of business;
  • conducting the business with integrity and fairness;
  • having accountability to, and fulfilling responsibility towards, all stakeholders;
  • making all the necessary disclosures correctly;
  • complying with all applicable laws and regulations.

Keeping this in mind, the essentials for having effective Corporate Governance practices in place are:

  • Board of Directors: A successful company is led by an effective and independent Board. The Board should comprise a mix of Executive Directors and Non-Executive Directors, including, Independent Directors. There should also be diversity of gender, age, geography, expertise and experience on the Board. A diverse and independent Board is, more often than not, independent in thought and in action.
  • Clear division of responsibilities between Board and management: There should be role clarity between the Board and the management, with the Board performing its role of superintendence, direction and control, and the management being responsible for executive action, and carrying on the instructions of the Board. The Board should ensure that it holds the management accountable for its actions.
  • Board and Committee meetings: In addition to being on the Board, each Director should also be on 2-3 Board level committees, so that the work of the committees is equitably distributed. The management should ensure that the agenda for the meetings is properly set, with contribution from Directors, and that agenda notes are sent well in advance. Directors on their part, should come well prepared for the meetings. The Chair should ensure that there is constructive tension in these meetings, with the Board members adequately challenging management.
  • Auditors: Statutory auditors and Internal auditors are very important gatekeepers of governance. They have been tasked to ensure that the financials of the company, as also the processes, are efficient, and reflect the true and fair picture.
  • Board processes: For Boards and committees to function properly, it is important for the Board members to together lay down proper Board processes. These include setting of agenda, receiving agenda papers, having an Action Taken Report, having a compliance certificate presented to it etc. The Board should also ensure that sufficient internal controls and processes, commensurate with the size of the company, are in place, and are functioning effectively.
  • Asymmetry of information: Asymmetry of information cannot be avoided. However, it should not be misused. All the Board members should have access to accurate, relevant and timely information at all times. A situation where some Board members have access to more information than others should be avoided.
  • Conflict of Interest: Situations of conflicts of interest should be avoided. Board members must declare any potential conflict at the beginning of each financial year, and must excuse themselves from discussions on any transaction where they are or could be conflicted.
  • Accurate disclosures: Listed companies must ensure that they disclose information regarding all the material matters timely and accurately. Such disclosures should be correct and complete.
  • Rights of shareholders: A company must treat all its shareholders fairly and equitably. Shareholders should be sufficiently informed about, and have the right to, participate in decisions concerning the company.
  • Rights of stakeholders: A company must make efforts to treat all its stakeholders equally.
  • Whistleblower mechanism: Each company must ensure that it is a well-functioning whistleblower mechanism so that any stakeholder can report any legitimate cause of concern, that could impact the company adversely.

Other things remaining the same, a better-governed company will reward stakeholders better, on a sustainable basis.

Tejal Patankar