Effective strategising, a commitment to accountability and transparency, and a clear-cut focus on the preservation of shareholder value are the key aspects that underline the governance gospel.
“Uneasy lies the head that wears the crown” and so it must be the case with not only the Chairman but also the entire board of directors of any organisation, for it is on them that rests the herculean responsibility of establishing a good corporate governance system and ensuring its compliance thereafter. No country today is immune to corporate governance disasters. As a result, companies have globally become more proactive and have started implementing better corporate governance measures, not merely to comply with regulation or to avoid shareholder criticism, but as a risk management tool.
In an era of constant change and progress in global markets, it would be worthwhile to re-explore the core guiding principles of effective governance. Strategising, accountability and maintaining/enhancing shareholder value are perhaps the three key aspects in devising a sound governance system. In the following paragraphs, we shall attempt to review their role in governance and their interconnectivity. Strategising is the core constituent of any Corporate Governance system. It is an indispensable element right from the very beginning till the end; whether it is laying down business codes or re-examining them, managing execution, managing risk, managing diversity or managing investments.
Strategising comes to the fore, at the very outset, while laying the foundation of an operational framework within which the company must function. Companies are basically governed by two sets of laws:
• The general law of the country concerning the conduct of companies;
• The code of principles which the business imposes upon itself.
An implicit outline of the business goals that need to be achieved and the parameters allowed, help to ensure a commitment towards governance principles. Ideally, governance standards should be formulated such that they foster economic growth, a dynamic global economy, and a trained and productive workforce, all of which are vital for present and future competitiveness. Besides, any organisation’s corporate strategy needs to be clearly expressed with proof points —facts that establish that the firm is headed in the right direction. Proof points could well be clients, revenue and new technologies.
Envisaging and implementing a well-defined set of governance principles, keeping in mind the aim of the enterprise, calls for considerable metacognitive skills on the part of the board and senior management. An intrinsic understanding of the business, the major risks and issues, and the corporation's financial reporting processes are other essential pre-requisites for good governance; since it is on this basis that the CEO and the management are able to take the lead in cost effective and profitable strategic planning. At this point, it would be worthwhile to mention about the orientation and education programme which the Four Seasons embarks upon for new directors, thus imparting to them a deeper insight into the company’s policies and functioning. An extract from their policy reads as: “All new directors will participate in this program, which should be completed within four months of a director first joining the Board of Directors. In addition, management will schedule periodic presentations for the Board of Directors to ensure they are aware of major business trends and industry practices as and when required.”
Next comes accountability coupled with integrity, which forms the mantle that holds and further strengthens, a healthy governance system. Once the foundation of the operational framework is laid, the clear allocation of roles and responsibilities of the board members and senior management helps facilitate their accountability to the company and its shareholders. The role of a proactive, focused “Board”, which has to monitor a stringent adherence to the mandated code, cannot be underestimated. These roles may vary along with the evolution and needs of the company. Such a delegation of duties does not depend solely on the ownership structure or complexity of the organisation but also on the corporate culture and the relative individual skills. During the selection and appointment of board members, it helps to have a formal job description in the appointment letter, which clearly states the term of office, duties and rights along with the entitlement on termination. Every organisation has its own specific requirements from a CEO and it is upto the directors to wisely designate this person who is going to be at the helm of all corporate affairs and strategic decisions. Good corporate governance ultimately requires people of integrity. It helps to have a means of alerting management and the board to potential misconduct without fear of retribution, and any violations of the code being suitably addressed.
One cannot afford to overlook the sound structuring of Board committees either. They enable the concerned directors to resolve various issues linked to remuneration, audit and nomination in all fairness, thus acting as a quality control mechanism. A particularly interesting practice that comes to my mind is that of an annual self-evaluation by the board at Marriott International, wherein the directors are asked to provide their assessments of the effectiveness of the board and the committees on which they serve. These individual assessments are then organized and summarized for discussion. As stated in Marriott’s memorandum of governance principles , this “self-evaluation process is also an important determinant for board tenure, and both the board and the nominating and corporate governance committee consider the results of the process as part of the nomination and selection process for both the board and its committees.”
We now navigate towards a more lithospherical or visible sector in corporate governance, that of shareholders’ satisfaction. Poor corporate governance certainly destroys shareholder value. It is at this point that sound financial governance assumes importance as a crucial subset of corporate governance and can be achieved only if the financial statements are a true presentation of the company’s pecuniary status, and not a distortion of its real performance. The principle of integrity and accountability rolls over into this arena of financial reporting best practice as well. The extent of involvement of Board directors as well as of the Audit committee is a critical determinant in achieving, maintaining and enhancing investor relations.
Disclosure levels can be reliable indicators of the extent to which individual organisations follow the best practice. An effective system of internal controls providing reasonable assurance that the firm’s records are accurate, that its assets are safeguarded and that it complies with the applicable laws, goes a long way in boosting investor confidence. Sharing corporate proposals with shareholders not only contributes to enhancing their awareness about the company’s plans and policies but also encourages effective participation. Using the company’s website for the official release of relevant information enables greater accessibility to company information by investors and shareholders and is common practice. Convening regular meetings provides a great opportunity to promote communication with shareholders and involve them in decision making.
On a conclusive note, one can say that the present day trend of transparency, urges corporate governance best practices in full measure since they directly impact the investment portfolios of organisations. A company's success is no longer gauged solely in terms of profits and revenue growth; social and environmental performance are increasingly integral parts of the assessment criteria. Organisations undergo microscopic examination for their business decisions and activities and this increased scrutiny goes beyond increased legislative and regulatory pressures. An ideal amalgamation of the above three aspects of strategy, accountability and preservation of shareholder value would hold any enterprise in good stead. It is in keeping with this spirit of corporate governance that organisational leaders must endeavour to execute their fiduciary responsibilities with utmost care.
About the Author
Ms. Aarti Sharma
Service: Executive Search
Office: New Delhi
Email: asharma@hvsinternational.com
Address: C-67, Anand Niketan
2nd Floor
New Delhi, ND, 110021
Phone: +91 11 2410-1005 (Work)
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