The canvas of Corporate Governance is very large. However, there are some important issues that should not be lost sight of. These are –
- 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.
- Asymmetry of information: Asymmetry of information should be reduced to the extent possible, among the community of stakeholders. Asymmetry can lead to persons with faster or better access to information taking undue advantage thereof, resulting in unjust enrichment of some persons.
- Separation between ownership and management: Ownership and management are two different functions, and should not ideally reside in the same set of individuals. Further, if these roles are separated, owners should not enter into the territory of management.
- Independence of the Board: For the Board to function effectively, it should be independent, in 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.
- Checks and balances: Proper checks and balances, commensurate with the size of the corporate should be in place.
- 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.
- Disclosure and transparency: All material issues/ events related 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.
- 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, are not oppressed.
- 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.
- 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.
Other major issues
- 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.
- Risk management: 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.
- 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.
- Remuneration structure: Most companies do not benchmark remuneration of senior executives 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.
- 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.
Absent the addressing of these issues, the Board will not be able to measure upto expectations.