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/