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.