Corporate Governance is important for the long-term sustainability of a company. There are some important challenges in the Corporate Governance space that should not be lost sight of as they pose continuing challenges to corporates. These are –
- Asymmetry of information: Asymmetry of information cannot be avoided. However, it should be reduced to the extent possible, among different stakeholders. Asymmetry can lead to persons with faster or better access to information taking undue advantage thereof, resulting in unjust enrichment of some persons.
- Conflict of Interest: Conflict of interest arises when a person/entity promotes his/her/its interest at the cost of that of the company. While law requires that conflict of interest should be avoided, identification and removal of conflict is not always easily.
- Disclosure and transparency: All material issues/ eventsrelated to a company should be disclosed in a timebound manner to the stakeholders of the company. Sometimes companies do not make true and complete disclosures, and are not transparent about some important affairs of the company. Transparency is a very important element for promoting Corporate Governance.
- Separation between ownership and management: Ownership and management are two different functions, and should not ideally reside in the same set of individuals. Lack of separation between these can sometimes lead to sub-optimal functioning of the management.
- Board composition: While the arithmetic of Board composition has been given in law and regulations, an optimal Board should factor in the right balance of executives and non-executives, and diversity of skills, experience, expertise, gender, age and geography. The Board should be composed based on the requirements of the company.
- Independence of the Board: For the Board to function effectively, it should be independent, both in letter and spirit. Failing this, the Board would end up rubberstamping management proposals. True independence is a state of mind. An independent Board is necessary to objectively hold management accountable.
- Board committees: Increasingly, the work of the Board would be done by committees, since the Board does not have adequate time to deep dive into individual items. It is important for the Board level committees to be rightly composed, and for them to meet with the frequency that is required for them to fulfil their objectives.
- Accountability: The management is accountable to the Board, and the Board in turn is accountable to the shareholders of a company. If either of them thinks of himself/herself as the owner, it will go against the grain of accountability.
- Checks and balances: Proper checks and balances, commensurate with the size of the corporate, should be in place. This includes putting in place proper SOPs and policies.
- Compliance with law and regulations: A good corporate should comply with laws and regulations. Failure to do so will invite severe negative consequences, including, but not limited to, legal proceedings. This could also result in an adverse impact to the reputation of the company.
- Minority shareholders and other stakeholders: A ‘controlling shareholder’ has significant powers and influence within a company. He/she/they may, at times, misuse this power, at the cost of minority shareholders and other stakeholders. While promoting the long-term interests of the company, it should be ensured that the interest of any shareholder, controlling or minority, is not oppressed. The same holds true for all the stakeholders of the company.
- Code of conduct or ethics: While profit-maximisation is an important goal of any company, companies should adopt ethical practices, which will promote reputation as well as the business prospects of the company.
- Risk management: A company operates in an environment of risk. The Boards and the Risk Management Committees (RMC) often fail to anticipate risks, and provide for their mitigation. While anticipated risks may be in the radar of the Board and RMC, unanticipated risks also need to be addressed, as and when they arise.
- Succession planning: A company is a “going concern”. Lack of a proper succession planning policy/process can leave the company with no ‘back-ups’ as and when there are exits, whether planned or unplanned. Succession should be planned for both Board and senior management personnel.
- Corporate citizenship – With ESG becoming increasingly important, a company should be seen as being a good corporate citizen, by contributing proactively to society, and the environment. CSR, which is a mandatory requirement, is no longer adequate. Boards should have continued exposure to the practices of the company in this regard.
- Focus on human resources: Attrition levels, remuneration structure, employee friendly policies etc are all important factors that the Board should not lose sight of. It is the human resource capital that sets a company apart from its competitors. In Covid times, the importance of policies relating to human resources has increased.
- Remuneration structure: Most companies do not benchmark remuneration of senior management persons with industry standards. The performance of the company is also not taken into consideration. A proper compensation structure goes a long way in motivation and retention of employees. Ideally, a proper remuneration structure should factor both fixed pay and variable pay, linked to the performance of the company.
None of these challenges can be ignored by a proactive Board. Absent the addressing of these, the Board will not be able to measure up to expectations.