Importance of Corporate Governance

Governance has many definitions. The International Standards for the Professional Practice of Internal Auditing (Standards) defines Governance as “the combination of processes and structures implemented by the Board to inform, direct, manage and monitor the activities of the organization towards the achievement of its objectives”.

As per OECD, Corporate Governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.

So, why do you think Governance / Corporate Governance is so important?

I believe, that as individuals and groups / companies we cannot work in isolation and any activity we embark, for profit or otherwise, has ramifications on a wider group of people (also called stakeholders). And often, these stakeholders are critical to the success of the activity. It is in the context, that governance becomes important as it is the foundation of your value system using which you deal with your stakeholders. It is a means to communicate your intention, set the tone of your engagement, drive expectation management and have a check whether things are going in the right direction.

Corporate governance has become a critical means through which the sense of right or wrong can be communicated thereby influencing the wider community in which we operate. Hence, a greater responsibility is bestowed upon the corporate world to do more than just selling their expertise i.e., quality goods and services. Corporates are more intertwined with the society at large than we can imagine. It is not about dictating values and morals to others, but to show people that you care by your actions, your influence, and your ability to take a stand.

For a corporate, it could be as simple as:

• having the right systems and processes to deliver a good quality product or service. In some cases, this could even be a matter of life and death for a customer who is consuming or utilizing your product or service.
• a VC / PE firm could add value to the underlying business till the investment is held, rather than just repackaging, and selling the investment for a profit.
•  consulting firms and IPO related entities could ensure that the shares of a company are listed at the right price there by not eroding shareholder value and confidence. The share price of many companies falls drastically after they are listed.
• find the right balance between profits and employee/supplier compensation for their services/goods. There may never be a specific answer for the question, how much profit is enough profit? Or how much salary is enough salary? But, it is important to have this conversation regularly through active engagement.

The above is just a small list of examples.  

In this age of “ESG” “Sustainability Reporting” “Integrated Reporting”, it is critical to ensure that the corporates are not focusing on CSR activities and creating glossy reports but are focusing on true governance by action. Some time-tested ways to achieve this are:

• Setting the tone from the top vis-à-vis culture, values and expected behaviour.
• Ensuring that there is sufficient documentation for employees to refer to when in doubt.
• Building trust within the organization where individuals feel confident to speak up to highlight matters that may hurt the company or the stakeholders or contribute towards improvements or new ideas.
• Ensuring adequate systems and processes are in place to have a check on the activities and act as a feedback loop for further changes / improvements.

Often the myth is that corporate governance is a noose around the neck for businessmen hampering them from achieving their targets. To the contrary, Corporate Governance is a strategic tool that helps the businessmen achieve their objectives.

What are your views on how corporate governance and whether/how it has a positive impact?