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Corporate Governance Demystified
Excellence Enablers Private Limited
August | 2016
A series of interfaces with the entire range of stakeholders of Corporate Governance, has given rise to a number of questions, issues, concerns and, happily, some suggestions and solutions. In each issue of this monthly newsletter, we will be getting two experts to articulate their thoughts on a specific topic. The third issue is now with you. Needless to add, we welcome your feedback.
Editor
SHOULD BOARDS CO-CREATE IN ORDER TO CO-OWN STRATEGY?
M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI
“The moping owl does to the moon complain
Of such, as wand’ring near her secret bower,
Molest her ancient solitary reign.”
(Thomas Gray)
Statutory and regulatory prescriptions consequent on corporate scandals, as well as increasing shareholder activism have together contributed to Boards that are engaging constructively with managements in pursuit of legitimate corporate goals. In the process, Boards are demonstrating an eagerness to shape strategy. Should Boards co-create strategy? Are they equipped to do so? When does intervention become interference? R. C. Bhargava and Vikram Singh Mehta share their perceptions.
R.C. Bhargava
Chairman, Maruti Suzuki
Independent Non-Executive
Director on Boards
Vikram Singh Mehta
Chairman, Brookings India and
Former CEO, Shell India
Independent Non-Executive
Director on Boards
A Company needs to have a long term, as well as a short term strategy to ensure future success and to enable it to better deal with the multitude of risks associated with operating businesses. The Government, and SEBI, have sought to improve corporate governance, and performance, by mandating that a Board must have Independent Directors.
The expectation is that Independent Directors will be people with wide experience, and skills in diverse fields relevant to the management of a business. If the shareholders of a Company ensure this while approving IDs, these IDs can play a very meaningful role in providing inputs for strategy formulation. If the shareholding of a Company is such that one person, or family, is in effective control, the quality of the Independent Directors, as well as their role in strategy formulation, will depend on the intent and attitude of the controlling shareholder.
I believe that all managements, irrespective of their shareholding, would greatly benefit by selecting IDs with a good understanding of business and risks, and involving them in strategy formulation. This would give them a sense of ownership, and thus involvement, in ensuring effective implementation and success of strategies. Unfortunately, this is not happening adequately. Where Boards do get involved in reviewing and monitoring implementation, and this too is infrequent, they are handicapped as they do not know the rationale behind the strategies. The Boards are then largely ineffective as far as strategies are concerned.
Should Boards co create in order to co own strategy”. Fascinating question and one that can be variously interpreted. My answer to this question is “no ” because I interpret it to imply that Boards should get more deeply engaged in the formulation and implementation of strategy and that without such deepening engagement they cannot discharge their fiduciary responsibilities . I do not believe this to be the case . Boards are the highest policy making body of the company and the approving authority for strategy. As such they do need to be involved in the creation of strategy and they cannot disclaim ownership. But Boards have limitations. They do not have the time and the knowledge to do more than provide advice, compel introspection and supervise performance against well marked metrics. Were they to endeavour to deepen their involvement, however laudable the intention, it could undermine the effectiveness of management to deliver.
The forces of technology, globalisation, demographics and geopolitics have altered the operating context. Management must now heed the possibility of a non linear future. They must develop strategies that offer robust responses to the counter factual “what if”. Towards this end, Boards should help management navigate the shoals of uncertainty and stay on the right strategic track. They should ask the right questions, challenge conventional wisdom and share information and experience. And in so doing, they should at all times ensure they do not cross the line that divides involvement from interference. The role of the Chairman is crucial in this regard.
Do let us know of any specific issues you would like to see addressed in subsequent issues.
Excellence Enablers
Corporate Governance Specialists | Adding value, not ticking boxes | www.excellenceenablers.com