Corporate Governance – Theory and Practice

Corporate Governance is much more than only compliance. Best practices in Corporate Governance set standards that are often higher than what is prescribed in laws and regulations. While the arithmetic of Board composition is prescribed in law, the quality of composition is very important for the functioning of the Board of Directors. Law prescribes independence for independent directors, but true independence is a state of mind. As a result, a number of Boards in India do not have truly independent directors. Another important aspect for proper functioning of a Board is its role clarity. The Board is accountable for its action to all stakeholders, and not only to shareholders.

Since the functioning of the Board of Directors is critical in ensuring Corporate Governance, periodic Board Evaluation and the performance evaluation of Directors becomes very important. Performance Evaluation of Directors can be done in-house or through an external agency. Performance evaluation of Directors by an external agency has been found to be more objective. If a Director’s performance evaluation yields an unsatisfactory conclusion, he or she should not remain on the Board. If persuasion does not succeed, the Board should remove the Independent Director, though, this should not lead to the removal of Independent Directors only because they do not toe the line of management.

It is imperative for good Corporate Governance that the Founders and the Board should put in place a process of succession planning so that at any given time, the company has a good leadership. Also, the Founders should not overstay on the Board. Their interests as owners can be protected by good professional leadership as a result of succession planning. Succession Planning is an excellent Corporate Governance Practice.

The basic precepts of good Corporate Governance are fundamental to all organisations. Every organisation, big or small, should have clarity of roles and responsibilities, a focus on strategic objectives and prudential risk management, appropriate financial management, and disciplined accountability and transparency to members, shareholders, and stakeholders. For more information: http://excellenceenablers.com/

Retain Your Investors' Trust With Corporate Governance

Investors, whether institutional or retail, are the owners of the company. They appoint Directors, who together form a Board, to ensure that their interests are not compromised. The Board in turn is accountable to these investors. Corporate governance  is the structure through which the Board lays down policies and processes to ensure that management conducts the business of the company fairly, transparently and justly. Over a period of time, if these systems operate effectively, and if the Board ensures that the interests of stakeholders are not compromised, investors start trusting it. A company with a robust corporate governance mechanism stands tall even during the tough times and successfully retains its investors.

Every organisation operates in an environment of uncertainty. Some of these factors are internal and controllable, but some are external and uncontrollable.  While the organisation can control the internal factors, it does not have any control over the external or the exogenous factors. The economic slowdown is one such external factor that affects the overall operation of an organisation to a great extent, but on which the company has not control.

Though the company cannot govern the market's terms and conditions, it can certainly sail through tough situations if it has gained and maintained the trust of its stakeholders in the past. Companies with good corporate governance structure often succeed in retaining the trust of its investors and in turn the market value. This also gets reflected through the reputation / image that the company enjoys.

There is enough empirical evidence to suggest that market rewards governance through a governance premium. Companies that are perceived to be well governed and have a good reputation, enjoy a premium in the market, through the price of the shares. In turn, investors stand to benefit since the value of their stock goes up.  For Information https://www.excellenceenablers.com/

Protect Stakeholders' Interest With Corporate Governance During M&A

In the modern business framework, Mergers & Acquisitions (M&A) have become one of the major tools to expand a business, whether within the country or internationally. However, with lucrative business opportunities, this also brings along the risk of losing millions of funds that are put on stake, should the deal go wrong. It is important that in an M&A deal, the deal should not end up risking the money of the company. It is this risk that needs to be mitigated, and corporate governance audit practices can play a vital role in this.

When a company decides to takeover another company, one of the key considerations that it has, in addition to the business model and financials, is the quality of senior management personnel and general management of the company. The Board of a company has a huge role in selecting the senior management. Also, effectiveness of management at the top is another related important criteria.Since proposal and approval for M&A transactions is done by senior management personnel and the Board, the quality of persons is very important. Good corporate governance structure will not only ensure a good management team but also a good quality of Board members. It would also ensure good and proper practices exist throughout the company, including for identifying deals such as M&A deals, which would be beneficial for the shareholders. Reputation of the company is another important criteria that is looked at in such deals. The custodian of reputation is the Board, and a Board comprising good Directors, would be very careful in preserving the reputation of the company.if all these factors exist, the valuation of the company increases. As it is, there is a governance premium attached to good companies. This premium ensures that the market capitalisation of the company is high because markets believe that the company is well governed and does the right things in a transparent manner. All this in turn benefits the shareholders of the company who are the owners of the company.

Consequently, a failed M&A deal may raise questions on the management and the governance of the company, thereby adversely impacting on its reputation. Effective governance processes will help establish proper, functioning and adequate enterprise risk mitigation systems that will help develop a firewall against risks, especially those that could arise out of failed M&A deals. Better governance can help reduce the risks of unsuccessful or over-priced M&A deals as well as reducing the likelihood of harm to minority shareholders. For more information: https://www.excellenceenablers.com/

Corporate Governance – Role of consultants

In the prevailing economic scenario, it is imperative that businesses find ways to stand out, stiffen their operations, and increase their profits while keeping their expenses at a minimum. To accomplish all this a Good Corporate governance is the need of the hour. An experienced consultant allows businesses to flourish in a more diverse way, rather than simply following the same old conformist methods of business.

Corporate Governance possess skills that are required for businesses to grow. Company’s Board of Directors has members with diversified expertise and experience. They are the actual 'on-ground' consultants any organisation can have, that bring a substantial amount of value on the table. Being an integral part of the organization, consultants provide firms with specialized expertise, identify the problems and provide the businesses the required consultancy support. They not necessarily bring in the “outside” perspective that clients most often seek but surely bring ‘’out of the box’’ ideas. 

To have great judgment, wisdom is essential, not the hard-core domain expertise. Members of the Board may lack in domain know-how but they should be familiar with the domain’s structure and its functionalities. Board of members’ both wisdom and judgment are generally the result of lots of experience in tough situations, some failure, and strong intelligence.  They understand the industry well and suggest measures accordingly for the overall wellbeing of the business. They have as much relevant context as possible in order to offer actionable and on-point advice. While providing support in analyzing and dealing with the company’s existing problems, they also offer a wide variety of solutions to fulfill the functional and technical objectives of the business.

As the board is a decision-making body hence they have their say in each and every policy and strategy formulation. From extending financial and legal support, board members are also being accountable for the overall administration of the organization. Board members with solid judgment help in navigating through difficult situations. 

It is important to have members from different horizons not just only consultants. While consultants and advisors may help the Board to refine strategy, it is for the management to originate strategy and for the Board to refine it.

Hence it is really essential that board members have the experience and gravitas required for good judgment. A highly experienced team of board members can craft a competitive advantage for firms in the corporate scenario.  For more information: http://www.excellenceenablers.com/governance-audit.html

Shareholder Democracy

A company’s shareholders are like an electorate in a democracy. Their views and voice must count. This is important because the shareholders are the owners of the company. Recognising this, the Companies Act, 2013 and SEBI’s LODR Regulations, 2015 have given a number of rights to the shareholders, including the right to vote on some important matters such as appointment of directors and auditors, managerial remuneration, approval of financial statements etc. Shareholders exercise these rights through general meetings.

Sometimes, two or more sets of shareholders enter into an agreement known as the Shareholders’ Agreement (SHA). This is important and useful to secure the rights and interests of the parties to the agreement. Parties to an SHA often have more information, better information or faster information. This creates information asymmetry and other shareholders suffer in comparison. This asymmetry of information are often in nature of Related Party Transactions (RPTs). Such RPTs are sometimes not at arms length and not in the ordinary course of business. Shareholders who are parties to the SHA often act in concert and this is frowned upon by regulators. However, SHAs cannot be avoided since they are based on which big ticket investments come into a company.   

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Aspects of Corporate Governance

Corporate governance is driven by the value system that a company follows. It is a set of principles, system and processes that acts as a guideline as to how a company can be governed, directed and managed. Corporate governance is often mistaken for compliance. Good Corporate Governance is based on values whereas compliance is in response to law and regulations. Corporate governance flows from the culture of the organisation. The right tone has to be set at the top.

Research has shown that markets attach a governance premium to the share prices of well-governed entities.  At the same time, there is a governance discount for companies where there could be murmurs that things are not okay.

The Comply or Explain (CorEx) principle in corporate governance is relatively new in India. It is based on the principle that if a company does not comply with a provision of law, it should explain the reason for the same to the shareholders, usually in the general meeting. However, CorEx will work only if shareholders ask the right questions to the management, and demand satisfactory answers. In the Companies Act, 2013, Corporate Social Responsibility (CSR) is the only provision which follows the principle of CorEx.

Another important contributor to corporate governance is Board diversity because varying and diverse backgrounds of the board members will ensure better attention to the interests of all stakeholders. Board diversity should be understood as much broader than only gender diversity. It should consider diversity of experience, expertise, background, geographies, age etc.

Constructive tension between the Board and the management is vital for corporate governance.  Peaceful coexistence between them yields sub-optimal results since there it could result in the Board agreeing to the management without constructively challenging it. The management too could get into a comfort zone of not providing enough alternatives etc for a constructive discussion.

Importance of Good Corporate Governance

It is said that the (good) governance is the soul of any growing society. It is true to all the successful businesses as well; to achieve its goal it is essential for the organization to follow certain guidelines. This is possible only under good governance, or the 'Corporate Governance', what we call it, generally. Good corporate governance in india is referred to as the method of leading a firm; through this governance, a company is carried and managed, as per the stakeholders’ requirements. Corporate Governance deals with formative ways to take operational and tactical decisions. It offers complete authority and thorough responsibility to the Board of Directors (BODs).

But, sometimes governance can turn into muddles as it is the fusion of process and arrangement constructed to aid the firm to accomplish its target. Hence, there are risks involved, some estimated and a few unforeseen. This is when the 'Internal Audit' plays a significant role. Through Internal Audit, the BOD avails the objective certainty of the efficiency of risk management, governance procedure, and internal control.

Internal Audit

Internal audit plays a crucial role in an organization’s corporate governance mechanisms and manoeuvres. It verifies that the firm meets the terms with the laws and all the parameters. It also supervises the operational results and validates the authenticity of the company’s bookkeeping. It provides the fortification against the wastage, exploitation and, on top of all, against the probable fraud. Not only this, but it also strives to detect the internal collapse. In case the management and the Board of Directors are not performing their duties as envisioned, then additional advice and recommendations are provided by the internal auditors, in order to improve the situation. Let's take the example of the recent collapse of IL&FS, India's one of the largest infrastructure and financial development companies. Had there been a provision of internal audit, the situation could have been different. The case of Satyam is also no different.

In a nutshell, internal audit provides an even-handed observation and delivers independent assurance that the risk management, internal control and governance of a firm are functioning efficiently. Internal audit is the unsung protagonist of corporate governance.

Internal Audit Procedures

The first and foremost step is to detect the area where auditing is essential, such as the operational departments where the company’s policies are used. Then define how frequent it needs to be practiced, as the internal audit can be executed on an annual, monthly or even on a daily basis. It differs from department to department, for instance, the manufacturing department might be audited every day due to the quality assurance, and on the other hand, the sales department may be audited monthly or annually. Scheduling audits are always preferred, as to provide managers with time to prepare. And at the end comes the documentation of the results, as the objective is to find gaps in obedience and to brainstorm the techniques to bridge the gap.
An organization only maintains the effectiveness and efficiency by following the policies and guidelines, which also helps them to deliver quality products and services to the clients. If we are looking for an effective corporate governance then the internal audit is one such tool that needs to be diligently practiced, which assures the constant quality of work. For more information visit us at http://www.excellenceenablers.com