The idea of TRUSTEESHIP
The on-going global financial crisis underlines the need for adopting good company practices
CORPORATE GOVERNANCE BY ASHOK OGRA
The scale of governance deficit in the entire corporate world has put the spotlight on the existing corporate governance systems. It also has brought to the fore the manner in which the financial experts analyze a problem, reminding us of the Chinese saying: “you should not only focus on your head when you have a headache because the real reason for your headache could be your foot”.
Being myopic in their approach with little or no interest in areas such as economics and social factors that have direct bearing on the way a crisis is triggered, it is no surprise that the well-paid wall- street wizards were the last to feel and acknowledge the financial and governance crisis that was unfolding in their backyard.
The result: the so-called custodians managing the interests of the shareholders simply let them down – failing to read the writing on the wall and to dig deeper into the balance sheets. ‘What about the allegiance to investors’, they screamed. Trust broken, the investors felt cheated.
However, it would be unfair to only target the analysts and wealth managers. What about the auditing firms entrusted to go beyond the numbers and lift the veil on the wrong doings, if any?
And, most importantly, what about the role of the independent directors serving on the boards that are supposed to oversee these companies that have recently gone bust?
‘‘A fish”, as the old proverb goes, “rots from the head.” Good governance depends crucially on the attitude of the company’s boss and its board.
Hence, the debate on the role of boards : its constitution, functioning and effectiveness. And how does good corporate governance play itself out in dealing with such situations – both predictable and unpredictable.
While the hype about the need for effective and transparent corporate governance is a recent development, the fact remains that it was Gandhi who first spoke about themes like ‘Trusteeship’ and its linkages to corporate stewardship.
Answers to these and many more related questions are being addressed by a number of books that have recently been published on the subject of corporate governance – both in India and abroad.
Leading scholars define corporate governance as “comprising the financial transparency, ethical codes of conduct and shared decision- making. It refers to the rules, processes, or laws by which businesses are operated, regulated, and controlled. ”
However, it is left to David Larcker and Brian Tayan of the Stanford Graduate School of Business who in their in their seminal work ‘Corporate Governance Matters – a Closer look at Organizational Choices and their Consequences’ to define it adequately and elaborately : “ collection of control mechanisms that an organization adopts to prevent or dissuade potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders. At a minimum, the monitoring system consists of a board of directors to oversee management and an external auditor to express an opinion on the reliability of financial statements. In most cases, however, governance systems are influenced by a much broader group of constituents, including owners of the firm, creditors, labor unions, customers, suppliers, investment analysts, the media, and regulators”.
The authors also refer to the regulatory framework but cautions that it does not on its own guarantee better governance unless accompanied by other measures.
The authors further argue that “Corporate Governance is characterized by a firm commitment and adoption of ethical practices by an organization across its value chain and in all of its dealings with wide group of shareholders encompassing employees, customers, vendors, regulators and shareholders ( including the minority shareholders ), in both good and bad times. To achieve this, certain checks and practices need to be whole-heartedly embraced ”.
If adopting corporate governance is that simple, a question arises, why is it that most of companies have not adopted it with the kind of seriousness that it requires and demands.
As Prof. Rammohan of Indian Institute of Management comments “corporate governance was supposed to be the great fix for lack of accountability in management. A decade or so after the governance revolution, how to fix corporate governance is itself the issue.”
According to David and Tayan “many so-called experts are heavy on opinions about governance, but light on the facts”. They further argue that if the FDA requires research on drug outcomes before approving a pharmaceutical, "Shouldn't experts that prescribe 'cures for bad governance' be subject to a similar standard of review ?" Standards yes, but to expand it to mean regulatory framework may create more problems that it intends to resolve.
In the Indian context it is important to remember that Satyam fiasco happened due to the lack of proper and effective supervision by the then Board of Directors, and also the lackadaisical attitude on behalf of the principal accounting firm, apart from the excessive greed of the owners.
The fact that a successful company such as Satyam could do no financial impropriety arises from our belief of associating ‘success’ and ‘share-holder’ value with ‘order’ and ‘transparency’. It also has to do with the way financial experts and analysts think and operate: true, facts are sacred but divergent opinions too need to be incorporated while designing, discussing and dissecting the financial and managerial architecture of a company
This new book showcases research into how boards can govern better. The authors researched hundreds of companies and interviewed many board directors to uncover and understand the consequences of corporate governance practices, and even question the conventional wisdom of the many books, reports, and recommendations on what constitutes "good" governance.
However, the authors focus remains the western countries; both China and India that are projected to be the world’s 1st and 3rd largest economies of the world by 2040 have received scant mention – just four pages. However, the footnotes at the end of each chapter provide valuable information about related books and other academic resources on the subject.
In praise of the sound thesis put forward by the authors, our own Narayan Murthy of Infosys writes “The complexity of corporate governance often lies in its propensity to become highly subjective. David and Brian’s objective and unbiased approach to this important subject is very refreshing………The book reflects the meticulous and through manner in which the authors have approached corporate governance systems. They have eye for detail and present every statement and observation with a firm factual foundation. Extensively researched with highly relevant insights this book serves as an ideal and practical reference for corporate executives and students of business administration”.
Published by Pearson , the book is divided into 14 chapters with each chapter devoted to “ Board of Directors : Duties & Liabilities”, “ Selection, Compensation & Removal”, “ Financial Reporting and External Audit ”, and so on. Published by Pearson Prentice Hall, it is worth the prize and a great addition to the literature already available in this area.
Notwithstanding the rich insight that the book offers, the fact remains that in the end it boils down to what Prof Rammohan says “sincerity, commitment and willingness to rock the boat in the pursuit of management accountability to shareholders count more than knowledge and expertise”.
Perhaps we also need to re-discover Gandhi and embrace his ‘trusteeship’ both in letter and spirit to achieve true corporate governance that serves the interests of all the stakeholders.
Nevertheless, the book will be of immense help in designing the governance systems in organizations and help in devising the decision-making processes and measuring organization’s performance.
Author, a native of Kashmir, is a noted media and management educator. He is currently Director, Apeejay Institute of Mass Communication. Previously, he worked in Discovery Channel & Animal Planet as Vice President for South Asia. He also serves on the Ascent Group that coach valley students for competitive examinations. He can be reached on: email@example.com
Lastupdate on : Mon, 10 Oct 2011 21:30:00 Makkah time
Lastupdate on : Mon, 10 Oct 2011 18:30:00 GMT
Lastupdate on : Tue, 11 Oct 2011 00:00:00 IST
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