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From The Desk Of A Corporate Governance Professional

Over the decades, a number of institutions and committees have attempted to define Corporate Governance. At its core, it is no more than doing the right things, in the right manner, at the right time and for the right reasons. Whenever a misdemeanour or a fraud in the corporate arena comes to public notice, questions are raised on the Corporate Governance practices in that entity. It is therefore useful to understand what constitutes the elements of good Corporate Governance, and how it can be ensured. The elements are

Avoidance of conflict of interest: Situations of conflicts of interest should be avoided. Board members must declare any existing or potential conflict at the beginning of each financial year, and must recuse themselves from discussions on any transaction where they are, or could be, conflicted.

Reduction of asymmetry of information: Asymmetry of information cannot be avoided. However, information that is not in public domain 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. This applies equally in the case of management personnel and others who “are in the know”.

Rights of shareholders and other stakeholders: A company must treat all its shareholders, and other stakeholders, fairly and equitably. Some shareholders should not get preferential treatment at the expense of others. Shareholders should be sufficiently informed about developments relating to, and decisions concerning the company.

Composition of the Board:  A successful company is led by an effective Board that conducts itself professionally. 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. Composition of the Board is the starting point for putting proper Corporate Governance processes in place.

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 out 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. Also, if some Directors are not on any committee, they will suffer from information asymmetry. 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.

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.

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 a true and fair picture.

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.

Compliance with law and regulations: Timely compliance with law and regulations is a non-negotiable requirement for each company. Not only the letter, but also the spirit of law should be respected.

Whistleblower mechanism: Each company must ensure that it has a well-functioning whistleblower mechanism so that any stakeholder can report any legitimate cause of concern, that could impact the company adversely.

Ultimately, the business of a company should be conducted fairly and with integrity. Other things remaining the same, a better governed company will reward stakeholders better, on a sustainable basis.